Is FHA the new subprime?

It has not been easy for even the most experienced REALTORS® to have survived the last two years and still be committed to succeed in this business in 2009. If you think that has been hard to do in real estate sales, multiply your situation times three and you have just become a mortgage broker. The subprime, easy loan market is nonexistent.

With the collapse of the secondary market, mortgage brokers are having a very tough time finding a mortgage product to sell. Some brokers have even been trying to recreate FHA as the “New Subprime.” However, experienced and well educated FHA loan officer will quickly point out that this is not the case.

To get an FHA loan, borrowers have to document income but can still secure a 97 percent loan! The qualifying ratios for conventional loans are 28/38. With FHA, 31 percent of borrowers’ income could go for housing expenses and 43 percent for overall debt payment requirements. Subprime lenders would not even ask about ratios. In other words, a borrower could just make it up!

One creative way to help a buyer get in a house with an FHA loan is to get a family member to co-sign. FHA permits non-occupying co-borrowers; parents, for example, can help a child buy a house without the stipulation that the parents live in the house as well. With FHA loans credit scores can be as low as 580, although scores in this range do take much more underwriting and do not always get a “YES.” Subprime loans, on the other hand, would allow just about any credit story; derogatory credit within the last 24 months would need reasonable explanation for approval. Borrowers can use alternative credit documentation, but this will also take a much more sophisticated underwriting process.

There are many lease/purchase properties in the market today. An agent may want to consider putting the buyer with troubled credit into a home with a contract for deed. Once a person lives in a home with a contract for deed for 12 months, this is no longer considered a purchase-money mortgage, just a refinance.

A creative seller could ease the burden of mortgage payments by employing this technique, and you get a sale next year. Make sure you instruct the buyer to keep a file with 12 months of cancelled checks. There is no reason why you cannot collect part of the rent as a commission. A year goes by quickly.

FHA is not anywhere near as permissive as subprime, but for now it’s a homebuyer’s best bet to getting a mortgage in 2009. There are a few creative guidelines that can be used in the program to help a buyer get a loan. Magic Financial Services is an approved FHA correspondent lender. Need help with this? Feel free to call me anytime.

Steven W Moreira CCIM
President Magic Financial Services Inc.
Phone # 407 767- 9400                                                                            Fax # 407 331- 2873                                                                                     Cell 407 256- 9081