During the previous housing market boom, FHA mortgages became rare. With high levels of appreciation in housing prices, combined with loose lending practices by major lenders – the FHA product was not competitive. Now with a large percentage of borrowers unable to qualify for conventional mortgages, FHA mortgages make sense again.

The Federal Housing Administration, commonly known as FHA, was created in 1934 as part of the New Deal to create opportunities of home ownership. Since its inception, FHA has insured over 34 million properties, and operates entirely from self generated income with no typical costs to tax payers.

Borrowers get FHA mortgages from private banks and lenders, just like any other mortgage. Borrowers pay a small fee as part of their mortgage payments for FHA insurance. In return, FHA insures mortgages for the lenders in case of default on the loan. The FHA program is intended for borrowers with weak credit or little or no cash who would otherwise not qualify for a conventional mortgage.

In recent years, lending practices relaxed for conventionally backed mortgages, and the types of customers who would have been FHA candidates were able to qualify for a wide variety of mortgage products without high credit scores or a large down payment. With the exception of a few niche markets, such as manufactured homes, the higher costs and more stringent requirements involved with FHA mortgages made them undesirable. FHA’s share of mortgages fell to only 7% of the market by 2007.

Now that the housing market is going through a period of declining values and increased foreclosures, lenders have radically tightened criteria to qualify for conventional mortgages. For many home owners needing to refinance and many new buyers, the only option is an FHA insured loan.

To further increase the new found popularity of FHA, new government changes geared to helping the housing market recover have been aimed primarily at the FHA. In September, the President Bush announced a new plan called FHASecure to assist in refinancing mortgages of home owners in risk of foreclosure. The program which features risk based premiums, with higher risk borrowers paying higher insurance premiums, began on January 1, 2008. The plan was expanded in April to cover a wider range of former subprime borrowers. FHASecure is expected to handle approximately 500,000 homes by the end of 2008.

Additionally, part of the Bush administration’s economic stimulus package which was passed by congress required FHA to increase allowable loan limits and streamline the loan underwriting process. In response, FHA published new loan limits on March 5, 2008. The loan maximums were increased to 125% of the medium sales price for each metropolitan area. For example, the maximum loan limit for the Tampa Bay area increased to $292,500 resulting in a much higher number of homes being able to qualify for FHA mortgages.

There are limitations. Even with the recent increase, the maximum mortgage for FHA in our area is $292,500 which still excludes a large number of home owners. Also, in addition to the required mortgage insurance premiums, homes must meet more stringent criteria for condition with FHA compared to competing mortgage types. Check with a mortgage or lending professional if you want to find out if this type of loan works for your situation.