10 May 2008 - It's not news to any of us that the mortgage lending environment has drastically changed over the past year: Subprime lending has dried up, no down payment loans have disappeared, and the once-common piggy-back loan is much harder to come by. Even conventional loans have seen stricter requirements and added fees in recent days.

So what do you do if you're in the marketplace for a home loan? For low- or moderate-income buyers with low down payments or blemished credit histories, I would suggest taking a close look at a loan backed by the Federal Housing Administration.

Unlike many mortgages today, which require at least 5 percent down, FHA loans call for a cash investment of only 3 percent - although this amount could change to anywhere from 0 to 3.5 percent depending on the result of FHA legislation currently being considered by Congress.

Other FHA benefits include competitive interest rates, foreclosure prevention programs and the allowance of gifts for down-payment funds. Plus, there are no prepayment penalties.

The FHA program is funded by its users, not taxpayers. Borrowers are required to pay an upfront mortgage insurance premium of 1.5 percent and annual premiums of 0.5 percent. When included with the monthly mortgage payment, many buyers find this tax-deductible premium is very affordable.

FHA loans, which once accounted for about 20 percent of all mortgage originations, saw a steep drop-off in usage in recent years, to less than 3 percent in 2007, much the result of cumbersome requirements that drove people away from the program.

"Subprime loans, which were virtually non-existent 10 years ago, took market share away from FHA and had accounted for about 20 percent of originations in recent years - right up to the credit crunch in August 2007," said Lawrence Yun, chief economist for the National Association of Realtors.

But with the subprime mess, FHA seems to be making a comeback with applications rising 95 percent in the fourth quarter of 2007 compared to the same period a year ago.
One reason consumers are beginning to see FHA as a more viable home loan option is because the program has seem dramatic improvements in recent years and a number of cumbersome requirements have been removed.

For example, FHA has adopted industry appraisal standards, has eliminated the requirement for sellers to make unnecessary repairs, and FHA no longer limits what closing costs the borrower can pay.

Together, these and other changes have made FHA a much more efficient and user-friendly program than it was in the '80s and '90s.

Although FHA loans cater to first-time and low- and moderate-income buyers, there are no income caps or restrictions for those who have previously bought a home. It's been said that even Donald Trump could get an FHA loan if he wanted one.

The Federal Housing Administration, however, limits how much you can borrow depending on your geographic area.

Prior to the government's economic stimulus package, FHA's lowest loan cap was $200,160 while the maximum loan amount was $362,790. Under the new temporary limits - which aim to increase the availability of FHA loans, especially in high-cost areas - the new base limit is $271,050 and the new cap is $729,750. With these new increases, many Utahns may find that FHA is now a viable option for their home mortgage. To see what the new loan limit is for your county, visit www.hud.gov.

Although these new limits are set to expire at the end of this year, current legislation is seeking to make the increases permanent, and Congress is also considering other measures to help create long-term improvements to the program.

For more information about how an FHA loan could benefit you, talk to your Realtor or a lender who is experienced in working with FHA loans.