FHA loans which were the original “subprime” loans have come to be known for great options for first time home buyers or buyer’s with bad credit because of their current features:
• Down Payment: they require very little down payment and that down payment can even be gifted from a family member or employer
• Credit: you don’t have to have stellar credit (or even a credit score at all with non-traditional trade lines) although most lenders require only 620 compared with Conventional at 680 or higher
• Debt Ratio: you can have higher debt ratio (up to 58% that I have seen) than conventional (44%)
• Co-Signer: Borrowers who are students with no monthly income can use their “kiddie condo” feature and have a family member co-sign and qualify for the same terms as if the borrower were to qualify all on their own.
• Streamline: Borrowers can also “streamline” refinance their loan with no appraisal or income documentation.
As of March 5th 3.3% of all mortgages are in foreclosure and 7.88% are in default (11.18% total). Default is considered more than 30 days late. Because of the attractive features of FHA loans the default rate on FHA loans (2.43% in foreclosure and 13.73% in default for a total of 16.16%) is much higher than Conventional loans (6.94%). FHA Streamline mortgages are currently at a 24% default rate…
As a result FHA is changing a few of its guidelines and proposed legislation could change the face of FHA even more.
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