When HUD came out with the FHA and VA programs, they were designed to fit the needs of the credit challenged borrower and the borrower with little to put down. When sub-prime programs hit the market, for a certain percentage of borrowers, it was easier to take the path of least resistance and use the program that would NOT require them to even prove that they qualified for the program. Many home sellers avoided offers that included FHA financing, because they did not want to deal with the picky improvements that FHA appraisers would call for. Those that obtained FHA and VA financing were often borrowers with imperfect credit history who did not have money for a down-payment.
Then came what is commonly referred to as "The Sub-Prime Mortgage Meltdown". Fannie Mae and Freddie Mac 30 year fixed lenders over-reacted to what they saw as poor lending decisions by originators. Existing banks with bad loans on their books turned VERY conservative in underwriting guidelines effectively permanently moving an entire segment of buyers away from housing if not permanently, for a very long time. Fannie Mae and Freddie Mac decided that if they were going to continue buying mortgages, they needed to make more from the good borrowers to make up for the losses from the ones that couldn't pay. They came out with a tier of risk based pricing that effectively penalizes safe borrowers! Those that do not have 40% (yes, I said 40%) down now MUST have a credit score above 719 to be eligible for the lowest rate on the market,
That's where FHA and Va come in. Here are some bullet points for the two programs.
•1) Although, you must still have a 580 credit score in order to be eligible, all credit scores above that level will get the low same rate.
•2) The monthly Private Mortgage for FHA is reduced in order to make it easier to make a payment.
•3) With VA, you may borrow 100% of the purchase price and have NO monthly Private Mortgage Insurance
Both programs require the borrower to borrow an additional amount to pay HUD as a service fee for offering the program. With FHA, the fee is 1.5% of the loan amount (this is pre-paid Mortgage Insurance designed to reduce the monthly mortgage insurance) and is non-refundable unless the borrower refinances into another FHA loan. At this point, the unused portion of the pre-paid MI is transferred to the new loan. With the Fed VA loan, the fee is called a "funding fee". The fee itself varies as it is as low as 2.15% for the first time use to 3.3% for subsequent uses. The fee is higher but there is no other program that will allow no money down with NO Private Mortgage Insurance with an interest rate that is as low as a conventional loan.
Borrowers previously considered as A1, now must accept higher rates if their credit scores drop below 720. These are the new breed of borrowers that fit into the FHA and VA loan option. Both can be no money down programs and HUD is allowing programs like Nehemiah to fund the down the minimum 3% down payment that FHA requires. Simply put, the seller agrees to pay 3% of the purchase price PLUS $495 to Nehemiah Corporation (a charitable foundation). When they receive these funds, the 3% is provided for the buyer at closing with the charity keeping the $495. There is no requirement that the money ever be paid back.
Both programs will continue to be a more important way to get good borrowers into good homes with little or nothing down. The loan limits have recently been increased by HUD. The single family FHA limit is $315,000 with the VA limit being the conforming limit of $417,000. Multi-unit homes have larger limits. The mortgage rates are very close to the lowest conforming rates available. At this writing, it was 6.5% but changes daily.