I am going to talk a little about the difference in FHA and Conventional loans. What is the real difference? Until recently, after the Subprime and the meltdown, it became not that much difference because the Conventional side became more like FHA in that higher loan to values with less restrictions for credit, funds for closing and documentation criteria were adapted. The Agencies concluded it was in their best interest to make some of the money associated with the high volume of Subprime loans that were being done and therefore lowered their guidelines to do it. That is why Fannie Mae and Freddie Mac had to accept the bailout of the government. They decided to take the 100% loans with less restrictiveguidelines and got themselves into deep trouble with many losses. Actually FHA did not make 100% financing but they still focused upon the low to moderate income individuals in the beginning with maximum financing of 97%, there about (3.5% down payment) now. There were some programs that would allow a second behind the first from a non profit organization or down payment assistance program. Mortgage Loans financing have probably changed forever and it may even get more restrictive although some banks have made excellent profits in the latter quarter.
With the mortgage meltdown, things are turning around to be more like they were; say, 10 to 15 years ago. Conventional loans are at a maximum of 95% loan to values with only financing for low to moderate income borrowers to 97% Community Home Buyer loans. The latter means your income can only be at a certain level to qualify, homebuyer education is required and it is a first time homebuyer incentive. All Conventional loans with loan to values greater than 80% must carrydefault insurance.{/spin]
FHA actually did become less [spin]restrictive loans or made into a pool for Fannie Mae or Freddie Mac within the secondary market. FHA loans on the other can also be obtained from the aforementioned type lenders, but they are insured by FHA (Federal Housing Administration) and have less restrictions and higher loan to values for everyone who can qualify.
From news of all the changes taking place, FHA is now somewhat providing to conventional borrowers and it is becoming harder for the average person who may had some issues which used to fit into the FHA product. At any rate; Restrictions are to help re-establish the lending process and Agencies because they guarantee the loans. Of course, FHA is stating that this is to protect their stability and promote certain “industry standards.” This has to be considered for all financial institutions to help stabilize the financial sector more than in the last couple of years. Conventional guidelines are going back to what they were years ago; conscientiousunderwriting. That is how I learned underwriting and when they implemented the automated underwriting systems, I think that is when the true down to earth quality of loans changed.
Why did they change something that allowed just about everyone to get a home? Plain and simple, everyone deserves a home (per congress) and it is true, everyone does deserve a home to call their own, but as hard as this may sound, not everyone can afford a home. This is especially true, when they are getting a home that is far above their income level and they do not have the money to pay the first house payment when it comes due. That is what occurred time and time again during the Subprime boom. It is something that is called being able to know the difference in desire and need. This is a highlight not conclusive of all differences by any means. FHA is less restrictive with their guidelines in closing cost, down payment, and first time homebuyers.
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