Now that subprime lenders are pulling back dramatically it is time to re-visit FHA loans. As recently as seven years ago (2000) FHA accounted for 14% of the mortgage market. This market share had dropped to below 3% by 2005. I do not have the numbers for 2006 but I am assuming that it dropped even further.
FHA almost blew it
I remember in the middle of 2006 I sat in a conference call listening to some speakers talk about the changes that were coming to the FHA. The powers to be at HUD had finally recognized the loss in market share and the way subprime lenders had eaten their lunch. Numerous changes were being proposed by the Secretary of HUD and these changes were awaiting Congressional approval.
We were told to be ready for some exciting changes that would give subprime lenders a run for their money! Well the subprime lenders sure as heck have run with their money as most of them are now OUT Of money. From what I have heard (I haven't been able to verify this) and what I also assume, the changes that were being proposed last year will be dropped. I do not see how Congress will create a government sponsored subprime lending fiasco in this climate.
Most mortgage brokers who have come into the industry in recent years do not have FHA experience. They will not know how to use this loan and also its target market. So what is FHA? Who is it for? How can FHA help the credit challenged borrower with low income?
Short Primer on FHA
FHA allows 97% financing with the remaining 3% contributed by as a gift from a non-profit. This essentially results in 100% financing. FHA is not a credit score driven program. While it will look at credit score in making its decision it doesn't deny a borrower outright solely based on credit score. However, you will never get an approval for a borrower with a very low score. It should be noted that FHA also can use non-traditional credit to make a manual credit decision.
For those borrowers with a higher than 565 credit score (I'm estimating here based on my experience), FHA guidelines use a series of compensating factors to make its underwriting decision. In this situation compensating factors become important. Compensating factors can be a combination of the following:
- A strong and stable job history - the longer the better
- A strong and stable rental history - the longer the better
- A greater than 3% down-payment - the larger the better
- A savings account with at least three months in payment reserves
- Change in housing payment - the smaller the better (a borrower going from a $800/month rent to $1200/month mortgage is better positioned than one going to a $1800/month mortgage)
- No recent derogatory accounts (within the past 12 months)
- Taken a home-buyers education class
- A debt to income ratio lower than the traditional measures
Not all have to be fulfilled in order to receive an approval but a few of these compensating factors can go a long ways towards obtaining a full approval.
Questions? Call me or write me. I'll be happy to help you.
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