FHA loans are making a comeback

They can be option for first-time buyers, people with bad credit

By AUBREY COHEN
SEATTLE P-I REPORTER

After being out of style during the housing boom of recent years, Federal Housing Administration loans have made a comeback, according to the agency.

FHA-insured loans traditionally have been a resource for first-time buyers and those with blemished credit because they require only a 3 percent down payment, have lower credit standards than conventional loans and allow borrowers to use gift money for down payments and closing costs.


They fell out of favor in recent years, thanks to an explosion of alternative private programs.

"Earlier this decade, the volume of FHA-insured mortgages fell significantly as home buyers took advantage of the terms offered by other lenders, especially subprime lenders," John Meyers, regional director of the Department of Housing and Urban Development, said in a news release Thursday.

But from October through May, the FHA insured 2,658 loans in the Seattle area and 11,924 statewide -- up 78 percent and 50 percent, respectively, from the entire 2007 fiscal year, which ended Sept. 31, and more than any of the previous three fiscal years.

Adam Stein, president of American Brokerage in Auburn, said until recently just 5 percent to 10 percent of his loans were FHA mortgages. Many mortgage brokers, he said, were not bothering with the FHA in recent years because it had high annual license fees and onerous standards, and there were alternatives.

But lenders killed off many of the new loan programs last summer, as more and more borrowers defaulted on these mortgages.

"As the subprime mortgage market began to have difficulties and borrowers wanted to minimize their risks, more and more home buyers have been coming back to the safe, smart and sound basics of FHA-insured mortgages," Meyers said.

Bill Glavin, special assistant to the FHA commissioner, said in an interview earlier this week that the FHA "has come back to being probably the most viable alternative for people with less-than-perfect credit and first-time home buyers."

FHA certainly made a comeback in Stein's office.

"I'm funding at least half my loans based on FHA (now)," he said.

Wells Fargo Home Mortgage also has seen a significant increase in FHA loans since last summer, said Randy Smith, regional sales manager for the lender. "We prefer not to quote specifics, but I'll say substantial."

The FHA said about half of the recent increase has come from refinancing of mortgages into the new FHASecure program, which the agency started in August to get borrowers out of adjustable-rate loans, even if they're delinquent and owe more than their homes are worth.

A smaller contributor, so far, has been an FHA loan-limit increase that Congress included in the stimulus package it approved in February. The package raised the cap in the King County from $362,790 to $567,500.

"We're starting to see some high-balance FHA loans," Smith said. But he estimated that 90 percent to 95 percent of Wells Fargo's jump in FHA lending has been below $362,790.

P-I reporter Aubrey Cohen can be reached at 206-448-8362 or aubreycohen@seattlepi.com. Read his Real Estate News blog at blog.seattlepi.com/realestatenews.