May

11

Real Estate Buyers: FHA To The Rescue

Filed Under Buyers, Mortgage Matters, Sellers, Sellers & Buyers | Comments Off

In this market, many buyers are struggling with the idea that they just don’t have enough money to put down in order to purchase a home. One of the most important things a buyer must establish is their threshold for monthly affordability (the ability to pay the mortgage payment). The more you put down, the less the monthly payment will be – obviously. However, with a monthly income high enough to handle “X” dollars per month in payment and other bills, you can obviously own real estate. It’s a matter of moving from a blanket thought of “I can’t afford it” to question of “How can I afford it?”

Enter FHA – Federal Housing Authority. FHA is not some government give-away. It’s not a “program” for low income homes. It is how the federal government helps banks to provide loans to certain home buyers with low money down, low credit scores or a combination of both. You can also have great credit scores and not a lot of money to put down. You can also have lots of money but choose not to put it down on the home and opt for an FHA loan product. FHA loans are simply guaranteed by the government.

A bank lends money and the FHA allows them guidelines to follow so that in the event the borrower defaults (doesn’t pay their loan) – the lender is paid back up to 80% of the loan. Fannie-Mae and Freddie-Mac are government sponsored enterprises (GSE’s) that provide mortgage backing for lenders. Lenders analyze risk when providing a loan to someone to purchase property. With real property (real estate), Fannie-Mae and Freddie-Mac allow banks to lend money with the sense of security that the loan will be paid back. However FHA loans are considered “good loans” because the application process is intense and the borrower is generally analyzed to be a low-risk candidate for a loan given certain different factors.

With an FHA loan, in black and white, the borrower must meet certain minimum requirements. FHA applicants are generally people with good documented work history. Credit scores do not have to be perfect. In fact, credit scores can be ultimately very low. FHA loans are not credit driven, although that has changed somewhat in recent months. Nevertheless, a credit score as low as 580 with again good documented work history, will most likely help the applicant to qualify for an FHA loan.

Why is FHA coming to the rescue?

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So to clarify this slide – a “subprime” or “alt-a” borrower is someone with weak credit and/or low money to put down. These are not “sub prime loans”. These terms are being used to describe the applicant. Applicants who were “subprime” candidates were simply lumped into subprime loans a few years ago. The problem with these loans is that they also hit a slowing economy with completely out of control energy prices. Combine those factors with an abuse by speculators, investors and mortgage companies and you have the gigantic mess that is the result of the “subprime” lending practices.

Through the years of 2004 to 2006, the mortgage market was dominated by subprime loans. See the next graph.
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What we’re seeing now is a stablization of the mortgage markets, thanks to FHA loans once again becoming the product of choice for borrowers. Investors really cannot use FHA loans because they are for owner-occupied properties. The people who will qualify for FHA loans will mostly be qualified people who will pay their mortgage. This is a good thing mainly because if you can afford the mortgage payment without having to put down 20% (especially here on Long Island), you’re accomplishing a few good things. One, you’re buying real estate that you own. Two, you’re using optimal amounts of leverage (other peoples money) to create an actual networth. You’re using other peoples money to achieve homeownership and wealth.

I don’t want to go beyond the scope of this article but I must include this here. America is mostly a financially illiterate country. I graduated high school without ever learning about credit, credit cards, money management, creating wealth, or investing. And since my parents were blue-color, they never received that education either. So it was not passed on to me. I woke up one day at the age of 33 and started learning about M O N E Y. And I’m still learning and will always be learning. My point within this article is, if you have questions, ask them!

Now, getting back to the article at hand here; The next graph comments on how the FHA is coming to the rescue.
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In making the process of application more streamlined and “normal”, the FHA has made it possible for people to actually get an FHA loan in a more user-friendly manner. Interested in finding out more? Call me and I will introduce you to experts in the FHA mortgage market.

Lastly, the final graph shows how FHA is becoming more widely used throughout the industry. This is such a good thing too because FHA loans represent solid lending practices. Fixed loans to applicants that have proven on documented paper, that they can afford their loan. Period.
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Homeownership cannot be looked at as a “risky investment”. Our founding fathers did not come here to rent! They came here to live free and own property. Of course, our government (especially locally) has created an environment where taxation without “good” representation is becoming increasingly apparent. However, that said, real estate ownership is and will remain a quality investment for families, for communities, states and for our country.

To find out more about FHA loans, please feel free to contact me at 1-631-587-1700, ext. 51.


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