This is a guest post by David Ruiz from Lender411.com.
The much-talked-about $8,000 homebuyer credit is coming to an end, but that doesn’t mean the government is no longer supporting first-time homebuyers or potential owners and borrowers. The federal Housing Administration (FHA) enables thousands of prospective homebuyers to access loans that they wouldn’t otherwise qualify for. As a result of the recent economic downturn, FHA loans now make up nearly a third of all mortgage loans in the United States.
Initially, this may sound like more of the same irrationality that got us
into our current financial crisis-unqualified buyers buying homes that they
can’t afford with loans that they can’t pay off. Admittedly, there are some
risks and controversies surrounding the FHA.
It’s true that FHA loans require minimal down payments, and it’s true that
loans with minimal down payments are harder to pay off and easier to default on. It’s true that individuals with poor credit scores often turn to the FHA to finance their homes because conventional loans are unavailable to
them. It’s also true that the FHA has picked up where the now-defunct
subprime market left off by providing loans to many of the highest-risk
borrowers in the nation.
But that’s kind of the point. Originally, the FHA was intended to be a back
door into homeownership for individuals who otherwise wouldn’t have made it onto the playing field due to economic strife. This is the kind of social development that our government and our taxes are intended to support. And in the end, the FHA isn’t actually lending money at all. The FHA insures loans made by conventional mortgage brokers to qualified candidates. This sets the FHA up as a safety net for lenders in case things go awry. Under the FHA, the exchange of money back and forth is still happening primarily in the private sector.
When you compare mortgage rates you will find the they currently at record lows right now, but many potential buyers with steady incomes and the ability to pay for homes are being turned away by lenders out of reactionary fear. Banks don’t want to take risks because the nation is in crisis. But allowing more potential borrowers access to mortgages will help kick-start
the flow of money in the housing industry again, and this may ultimately set
the foundation for continued growth and recovery. The FHA helped get the
United States out of the Great Depression. It’s reasonable to conclude that
a similar strategy may be successful in our current financial situation.