This graphic (right) from the Washington post nicely illustrates the resurgence of FHA lending (something we noted in this space way back in Sept of 2007) as a primary option for many, but especially first time, homebuyers.
This rebirth has happened largely because the FHA’s government backing has enabled them to maintain modest down payment (3.5%) and flexible credit standards (as low as 600 FICO with many lenders, though this may drift higher in 2009) in the face of seemingly endless tightening in the conventional market.
The knock on FHA, as compared to conventional, was always that FHA required a larger down payment and that their minimum property standards were higher, forcing sellers to fix a lot of issues before closing.
At least one part of that statement is no longer entirely true.
Now, FHA has the lowest down payment standards in the broader market (aside from a niche/targeted programs, such as USDA and VA) with lower credit thresholds to boot – small wonder FHA is making a comeback.
Though we will push back on one aspect of FHA financing mentioned in the article, regarding the minimum property standards. As the Washington Post reports it:
“But the FHA has lifted some of its more onerous rules, and almost no conventional loans are being made without an appraisal, making their requirements similar.”
Granted, this statement is true enough, but don’t let the second part mislead you into thinking an FHA appraisal is now “just like” a conventional appraisal. Far from it.
Sellers and buyers are still dealing with an awful lot of FHA inspection related brain damage, especially in homes built prior to 1978 (the date, before which all homes are assumed to have lead paint.)
Not that this makes FHA an inferior loan in any meaningful way, but don’t assume the inspection process will be easy. Both buyers and sellers should expect to see a laundry list of FHA required repairs once the transaction takes shape. Smart sellers and their agents are dealing with any potential issues before even marketing the home.
· Stuck for Financing? Don’t Count Out FHA [Washington Post]