One of the big mortgage stories of the financial crisis is the growth of FHA loans as a replacement to conventional mortgage loans and as a replacement to sub-prime loans. According to data from the National Association of Realtors, FHA loans grew from 7% of mortgaqe loans in 2007 to 25% in 2008. That number has probably increased even more in 2009.
This increase has been driven by two factors according to the NAR:
- First, under the Economic Stimulus Act of 2008, the loan limit that Government Sponsored Enterprises can purchase in the secondary mortgage market increased from $417,000 to $729,500 in high cost areas, and this allowed many houses to became available for FHA insured loans.
- Second, subprime loans have disappeared since the credit crunch in 2007 and more home buyers turned to FHA insured loans and VA (the U.S. Veterans Administration) guaranteed loans as well as Farm Service Agency (FSA)/ Rural Housing Service (RHS) guaranteed loans.
Indeed, it's hard to see why someone would now choose a conforming mortgage loan over an FHA loan. I did a quick check of mortgage rates and found that the FHA 30-year mortgage rate for my areas was 4.714 % APY versus 4.586% APY for a conforming 30-year mortgage loan. That's not a big difference. The FHA loan though comes with lower underwriting standards and is thus easier for those with some credit blemishes to get. FHA loans also require much lower downpayment amounts, as low as 3.5% of the house price.
FHA loans do require the buyer to pre-pay mortgage insurance but the amount on most homes comes out to between $15-30, hardly a burden. It's easy to see why FHA loans have grown in popularity.
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