Historically, there has always been a rise and fall in popularity of particular lending programs. An example of this can be proven with the Adjustable Rate Mortgages (ARMs) that were so popular just a short time ago and are so terribly unpopular now. Merely whispering their existence makes heads spin, something akin to Linda Blair in the Exorcist.
Now it is true that in many many cases, these ARM programs were promoted and utilized in lending situations that were definitely wrong or ill-advised. Some of the current mortgage predicament can be directly linked to their flagrantly inappropriate usage, but the unpopularity that currently surrounds them doesn't alter or disprove the fact that once-upon-a-time they were extremely popular and in great demand. (It also can be argued that if used properly and by the correct borrower, they can provide the perfect lending opportunity and be a helpful financial tool.) But for now, what was once "up" is "down". We experienced the rise and fall of a program.
Until recently, FHA loans were another example of this phenomenon. They had been taking a back seat in many cases to other lending programs, most notably the Conventional Loan which was viewed as more preferable. The pendulum has now swung back to FHA as the preferred source of financing for many home buyers and owners. Because of the current economy, the ability to borrow monies through them at higher loan-to-values (meaning lower down payment requirements) is now seen as one of the biggest advantages the FHA-insured mortgage can offer.
Another advantage seen within FHA programs is the lower costing monthly mortgage insurance available with these loans. Just the fact that you actually have the ability to obtain mortgage insurance is astounding. Furthermore, FHA products allow "gifts" for use in down payment, which is only an amazing 3.5%. Conventional borrowers have to demonstrate and document a minimum of 5% down payment of their own money before any gift monies can be accepted and utilized within the loan.
Perhaps the greatest advantage of an FHA loan today is the pricing of the loan. The rate and fees of a FHA loan are NOT CREDIT SCORE DRIVEN. That means that all FHA approved buyers (from 620 FICO scores to 800 FICO scores) can presently receive the same interest rate. With Conventional Loans this is not true. Conventional Loans are "tiered" every 20 points. An example of this would be, a borrower with a credit score of greater than 740 would get a lower interest rate or fees than the borrower with 720. The same "tiering" would occur on down the FICO scores at 700, 640, 660, 640, and etc.
Lastly, FHA loans are arm-wrestling conventional loans down to the ground in regards to their view on past credit issues. FHA is definitely more forgiving on these issues, the lack of credit, and also the lack of "reserves" (money retained by a borrower after a down payment is made at closing). Simply put, in today's financing environment more loans are going FHA because they demand the lowest down payment, offer lower monthly payments, and increase chances for approval.
The pendulum is presently moving towards FHA loans. As borrowers needs change and the economic climate improves, will the direction change again? What lending programs will best address those future needs? Will it be some conventional form of lending that already exists or some newly introduced program? Watch ... and be alert to the swing of the pendulum.
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