The first home I ever bought was financed with an FHA loan.
At the time I had no idea how the down payment requirement was
concocted or that the FHA did not actually provide the loan
money I needed to finance the property. Ignorance was bliss and
I was elated with my first house.
Like millions of other buyers before and since, the FHA
program made sense to me because it required little down and had
liberal qualification standards. It also provided a gateway to
future benefits: That first home grew in value and became the
basis for subsequent real estate purchases.
The FHA
program is not a loan plan -- you don't get dollars from the
government. Instead, it's insurance. The government says that in
exchange for a premium paid by borrowers it will help lenders
get their money back in the event a property must be foreclosed.
Given the size of the government, it's a powerful co-signer and
lenders gleefully accept its repayment promise. As a result,
instead of requiring 20 percent down you can buy owner-occupied
property with 3 percent down plus closing costs through the FHA
plan.
You can use the FHA loan program to buy a first home, a
property with as many as four units (as long as you live in
one), a replacement (move-up) property or to purchase and fix-up
a house. You can also use the FHA program to refinance. Such
programs are enormously popular: According to the Mortgage
Insurance Companies of America (MICA), 1.2 million FHA mortgages
were created in 2002. That compares for the same year with
382,000 VA
mortgages as well as 2.3 million loans backed by private
mortgage insurance (MI).
One catch to FHA financing is that the amount you can insure
is limited. How much you can get is determined by where you
live. For details, see the FHA
loan limit webpage.
HUD has now proposed FHA loans with nothing
down, an approach which will particularly benefit first-time
homebuyers.
In the usual case I'm not thrilled by loan programs with
nothing down. I think it's important to have equity and that
saving is a valuable financial exercise. At the same time I
cannot ignore the VA mortgage program, a hugely-successful plan
which for decades has provided loans with nothing down to those
with qualifying federal service.
Critics of the FHA proposal note that the federal agency
already has a significant foreclosure rate, one far higher than
most private mortgage plans. Statistically they're right:
According to the Mortgage Bankers Association -- a group which strongly
supports the FHA zero-down plan -- during the
third quarter of 2003 FHA loans had a 2.80 percent
foreclosure rate compared with 0.84 percent for conventional
financing and 1.53 percent for VA loans.
But HUD is a government agency, not a private lender, so the
measures of success and failure are different. Like the army, no
one expects HUD to make a profit. Like the VA, HUD has a social
responsibility and should take more chances than private loan
guarantors. More risk equals more foreclosures -- and also more
opportunities for those who might otherwise not find financing.
If it's true that FHA has a 2.8 foreclosure rate, it's equally
true that 97.2 percent of its loans are not being foreclosed.
That's an "A" by most standards.
Congress should approve the HUD proposal because a zero-down
FHA loan would help many people who have good incomes but little
in savings. Some zero-down loans will fail, but that's why the
FHA collects insurance premiums. As well, an FHA zero-down
program would do something else: It would provide a zero-down
benchmark consumers could compare with private programs,
something good for the marketplace.
Published: February 17, 2004
