FHA Loans May be Gaining Ground

[Apr 20, 2008.]

There are indications that the FHA loan, once spurned by consumers, may be gaining popularity. The turnabout comes in the midst of the worst housing crisis in 16 years.

Many subprime borrowers are facing the prospect of default. In this climate, banks are reluctant to extend 100% financing on mortgages. As a result, FHA loans are attracting more interest.

In the 4-month period which ended January 31st, the FHA insured 49% more loans, according to the U.S. Department of Housing and Urban Development. The FHA may gain even more ground in the next few months because of the economic stimulus package signed by President George W. Bush. The legislation increases FHA loan limits until December 31st. Legislation now pending in Congress would hike the ceiling permanently and would also mean lower down payments for homebuyers.

The FHA program has insured more than 34 million mortgages since it started in the year 1934. It requires small down payments and is more flexible than conventional loans in figuring out income and payment rates. The FHA loan is a particular favorite for those with shaky credit histories, low incomes, or little money for down payments.

However, in the early part of this decade, new loan products appeared on the financial horizon, making FHA loans less popular. For instance, piggyback loans permitted home buyers to purchase larger homes with next to no money down. Subprime mortgages also caught fire with consumers. The subprime loan crisis, however, has changed all that, and now FHA loans are becoming preferable. FHA loans have also become easier to obtain, accounting for their renewed popularity.

Some experts do not expect the housing market to recover from its current crisis until well into the year 2010. As a result of the situation, the housing crisis has become a major issue in this year’s contentious Presidential race.

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