The New FHA—
Subprime Alternative

some time before the transaction takes place. FHA also requires no cash in the bank (also known as cash reserves) after settlement.

More Lenient Qualification Standards. FHA requires less income to qualify for a mortgage. The standards allow a housing payment which is 31% of a borrower's gross monthly income and total debt service which is 43% of a borrower's gross monthly income. By contrast, most conventional programs have ratios of 28% and 36%. FHA also allows a

prospective borrower who does not qualify to add a related co-borrower to the application--and this related co-borrower does not have to live in the home. Even more importantly, FHA does not require a credit score to qualify for a mortgage and thus has no minimum credit score standards. It should be noted that FHA has proposed varying the cost of FHA mortgage insurance by credit score. This is called “risked-based pricing.”

FHA ARM Program. The FHA one-year and 3/1 adjustable mortgage programs are very popular because annual adjustments are limited to one percent each year, as compared to most conventional adjustables which have caps of two percent each year. For example, this means that the 3/1 adjustable can only increase one percent at the start of the 4th year. Also, the lifetime cap on these FHA adjustables is five percent, while most conventional alternatives have a six percent limit.

e have undergone a credit crisis in America. This is a crisis that has taken away many home financing alternatives for those with fair to poor credit. However, Americans are not without home financing alternatives. It is time to take a good look at an old standard—FHA financing.

For years, FHA was the standard for first time buyers, immigrants and those with credit issues. During the real estate and subprime boom, FHA financing shrunk from over 25% of the loans in America to well under 5% of the market. But now the government has moved to make FHA more attractive. Early this year, Congress passed a bill to raise the FHA loan limits in many parts of the country, at least on a temporary basis. In the meanwhile bills have been passed to permanently increase these limits and make additional modifications to help the average American finance his/her home.

Even without these modifications, here are some of the advantages of FHA...
A Low Downpayment. Generally the downpayment on a FHA mortgage is very affordable as compared to conventional financing. The down-payment required is less than 3.0%. A total of 3.0% cash is required from the borrower’s owner funds to be invested in the total transaction, inclusive of closing costs.

A More Liberal Gift Policy. FHA borrowers virtually do not have to come to the transaction with any liquid assets in savings. All money may be provided by a gift from a relative. Relatively all conventional lending requires that a certain amount of the borrower’s funds belong to the borrower through savings amassed

FHA Loans Are Assumable. Though not as freely assumable as a few years ago, FHA remains as one of the few programs to allow assumption of adjustable and fixed rate mortgages at the same rate and term as the original loan. This is a major advantage when you are trying to sell your home in a high-rate environment. Note that the assumption must be accomplished by an owner-occupant who is credit- qualified.

FHA Has No Maximum Income Limits. Though FHA loans are limited as to a maximum loan amount, there is no maximum income limitation. Many conventional first time buyer programs that allow a minimum downpayment, zero cash reserves and expanded ratios also limit either the maximum income level of the borrower or restrict lending to certain locations.

Put it all together and you have a program that packs a lot of punch. If you are in the market to purchase a home, you should look seriously at an FHA mortgage. Keep in mind that mortgage insurance is required for all FHA mortgages, regardless of the down payment made. You must consider this cost in any comparison...□