It was not that many years ago that home buyers with just about any credit score could purchase a home with little to no money out of pocket. When those relaxed lending guidelines were coupled with depreciating real estate values, the result was hundreds of thousands of homeowners upside down in their mortgages and unable to refinance. To complicate the situation even more, a good percentage of these borrowers took out adjustable rate mortgages, many with 2 to 3 year introductory rates. And unlike many Freddie Mac and Fannie Mae agency products, there was likely no chance of these sub-prime mortgage rates remaining flat or even adjusting to a lower rate. Lending guidelines also tightened significantly for most products making borrowers who previously would have qualified for refinancing stuck in their current program.
Today there are a few low and zero down mortgage products in the marketplace including FHA loans, VA loans, and USDA rural housing mortgages. FHA loans, run by the Federal Housing Administration, are insured against default by the FHA. Approved lenders are guaranteed that they won’t have to write off a mortgage if the borrower defaults on his or her loan. FHA does keep track of the default rates of the various FHA approved lenders and companies can lose their right to participate if they show a poor track record. Down payment requirements change periodically and currently many FHA products require a 3.5down payment (subject to change). FHA loans are popular many reasons. First, unlike USDA loans, there are no income caps. Meaning you can make $200,000 and still obtain an FHA mortgage as long as all other qualifying criteria are met. FHA loans are also thought of as having slightly less strict underwriting guidelines. One downside to FHA loans is that loan limits may be lower than what would be available under Fannie Mae’s and Freddie Mac’s conforming loan limits. FHA loans also have an upfront private mortgage insurance (PMI) premium and recurring PMI payments are added to monthly payments for a set number of years even if one’s loan-to-value ratio drops below the 20% threshold where many lenders eliminate PMI.