Too Good to be True?
With all of the turmoil in the mortgage market, there still seems to be a breath of hope in loans guaranteed by the Federal Housing Administration (FHA), which makes funds available for purchases up to 106% of the purchase price with FICO scores as low as 585.
Mortgages that allow consumers to put little or no money down have largely disappeared and borrowers with less than sterling credit (FICO below 620) seem to have been left in the dust of the collapse of the subprime mortgage industry. Although it is raising concerns among those who blame the “no-money down” mortgages for the present crisis, money is still available through the FHA. FHA has renewed a push to eliminate these programs, but for now, they are still around.
This is how it works: FHA will lend up to 97% of the purchase price. Private non-profit companies (for a small fee) will serve as an intermediary for a seller-paid down payment which accommodates the 3% of the purchase not covered by FHA. Actually the seller “gives” the money to the non-profit, which, in turn, “gives” it to the buyer. The seller also provides up to 6% of the purchase price as seller paid closing costs. It is a bit of a game because the seller can just increase the agreed upon price by 9% and cover all of these costs. The sellers win because they unload the home at a decent price and the buyer wins by not having to put down a penny to buy a new home. The only loser may be the taxpayers who are putting this money out for borrowers who may be prone to default. FHA underwriters look principally at the borrower’s capacity to service the debt and look less at credit and reserves, which are two important components of a borrower’s ability to repay.
Homebuilders and sellers love this program because it gives them incentives to offer to buyers. These loans are usually fixed-rate loans to borrowers with income verification who have re-established credit within the recent past. However, in the current version of the FHA modernization bill which is presently in the Senate, these down payment programs would be eliminated. For now, the story is good and it is true.
