The FHA Loan’s Comeback Tour

As far back as the Great Depression, Federal Housing Administration (FHA) loans have been helping Americans with poor credit buy homes. Recently lost in the shuffle of skyrocketing …

As far back as the Great Depression, Federal Housing Administration (FHA) loans have been helping Americans with poor credit buy homes. Recently lost in the shuffle of skyrocketing housing prices and a wave of subprime loans, the FHA loan is back.

The late 1990s and early 2000s were not good to the FHA loan, as its stringent guidelines and mortgage limits were pushed aside by the easier-to-obtain subprime loan. The subprime loans offered lax qualifications such as higher debt-to-income (DTI) ratios and no-money-down options. In addition, subprime loans did not have as many strings attached to them such as the strict appraisal process. For most people, the subprime loan was clearly the more attractive choice, and the FHA loan began to fade into oblivion.

Recently, though, a steep rise in foreclosures and subprime lenders filing for bankruptcy has had a negative impact on the once popular subprime loan. As the subprime loans are disappearing, the old FHA loan is now making a comeback. Most people who were familiar with the FHA loan prior to its virtual disappearance might not realize that the program as it exists today is very different.

A 2005 revision to the less attractive FHA loan rules may help to rebuild the loan’s popularity; FHA loans slipped to just 4 percent of all home loans in 2006 compared to 18 percent in 1990, according to Mortgage Foundation. Among the changes, the FHA raised mortgage limits to comply with today’s home prices and eliminated a number of picky cosmetic requirements that were a part of FHA appraisals, such as repairing cracked windows prior to closing.

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FHA loans are currently available only to homes that fit under the specified mortgage limits. In high-cost areas such as New York and Los Angeles, there is a loan limit for single family homes of $362,790, while low-cost areas such as Iowa and Kentucky have a loan limit of $200,160, according to Mortgage limits vary by county within each state; consult FHA’s website for the lending limit in a specific county.

Property owners purposefully avoided FHA loan buyers in years past due to the tough requirements of the program, but FHA’s renewed popularity should force them to reconsider. Although requirements have been eased, it is important to know that some still exist. FHA’s list of items that must be repaired includes leaking or worn out roofs and structural issues, such as excessive foundation settlement, among other things. FHA appraisers can also mandate repairs for faulty electrical or plumbing systems, standing water against the home’s foundation and hazardous materials on the property.

While some of these repairs may be expensive or time-consuming, failure to comply with all of the issues checked by FHA appraisers will automatically eliminate a property from consideration for an FHA loan. Investors whose properties fit within local FHA mortgage limits should take full stock of all of their property’s issues, as it is very possible that some FHA loan endorsed buyers will come calling.

Although FHA loans do not offer the financial flexibility that was promised by the subprime loan, they still allow individuals to receive financing of up to 97 percent, according to

As FHA loans pick up the market share left by the fall of subprime loans, investors with qualifying properties should be sure to maintain them at least at the FHA minimum requirements, in order to ensure their properties won’t fail when willing buyers are at the doorstep.


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