FHA loans soar in popularity as market crisis worsens
As the mortgage and credit crisis continues, the Federal Housing Administration is becoming a lifeline for homebuyers seeking affordable mortgages.
That includes the seven-county Pittsburgh region, where the Department of Housing and Urban Development issued 5,521 FHA-insured loans for home purchases in 2008, a 105 percent increase over 2,692 loans in 2007.
Nationally, the FHA had only 4 percent of the mortgage market, three years ago. Today, it has more than 21 percent.
There are good reasons for those statistics, says Brad McLean, vice president of West Penn Financial Service Center Inc. in the Strip District.
"FHA loans are attractive because they have a lower down payment requirement of 3.5 percent of the purchase price, more lenient underwriting criteria and offer better pricing," McLean said. His company has seen FHA lending rise from about 25 percent of its business in mid-2008 to about 60 percent.
To obtain a conventional fixed-rate loan, homebuyers usually are required to have a 20 percent down payment. On a $100,000 home loan, a conventional down payment would be $20,000. With an FHA-backed loan it would be $3,500.
Such terms make FHA-backed loans especially attractive for first-time buyers such as Steve and Jen Donelli, who used the program to buy a townhome in Cranberry.
Obtaining a mortgage through Howard Hanna Financial Services was an easy process for the couple, according to Jen, who — along with her husband — works for Abel Fire Protection Inc. in McCandless.
"We didn't have enough for a conventional loan, although we made a down payment of nearly 5 percent," she said.
The couple secured a fixed-rate, 30-year mortgage with an interest rate of 5.5 percent.
"FHA loans are about 53 percent of our mortgage business," said Mark Steele, president of Howard Hanna Financial Services in Pittsburgh.
That's up from 14 percent in 2007.
Other local lenders offering FHA loans report similar increases.
"Our FHA application volume has doubled in the past six months," said Mike Henry, vice president for residential lending at Downtown-based Dollar Bank.
In addition to a low down payment, the program also has other attractive features, experts say.
For example, FHA permits homebuyers to use gifts from family members, non-profit groups and employers to make their down payment, while conventional lenders require buyers to contribute at least some portion of the payment from their own funds.
Many lenders set a minimum credit score of 580 for FHA loans. That's well below the national average score of 723.
To obtain a conventional loan, the buyer must have a credit score of at least 720 or pay points, said West Penn's McLean. One point equals 1 percent of the mortgage amount. To obtain an FHA loan, the credit score must be in the 600 range, or at least 620, in this area, he said.
The ratio of debt to income can be as much as 31 percent of gross income, while all of the borrower's debt — for instance, including car payment and credit card balances — can be as much as 43 percent of income.
Borrowers are required to document their income for an FHA loan, and although there are no income limits on the borrower, the agency sets limits on the maximum amount of a loan it will insure. The limit is $417,000 in the Pittsburgh market.
FHA loans require mortgage insurance that can make them more expensive than conventional loans, experts note.
There is an initial insurance payment of 1.75 percent of the purchase price, followed by annual payments that usually are 0.5 percent on the outstanding balance. These payments end when the amount owed reaches about 78 percent of the value of the home.
Nonetheless, the loans are a good option for people who might otherwise be shut out of the market or get loans with high interest rates. That also includes people with less-than-perfect credit, according to the FHA and lenders. For some, these loans are now the only option.
That increasingly has become the case as conventional lending has seized up, said Frank Donnelly, a member of the board of governors of the Mortgage Bankers Association of Metropolitan Washington, D.C.
"If your choices are between no contract and an FHA contract, FHA looks good," he said.
FHA said that almost 80 percent of its loans go to first-time homebuyers and more than 33 percent of them are minority homebuyers.