This week, FHA will start offering two new types of loans designed to compete with sub-prime lenders. These loans offer some important and specific benefits to first-time buyers with less than perfect credit, or who may need to borrow more and have a higher debt-to-income ratio than conventional lenders will accept.

Loan #1: Low-downpayment loan plus up to $15,000 in cash for renovating after close.

The idea behind this loan is that after you close, the lender will give you $5,000 to $15,000 in cash to help bring the house up to FHA standards. The cash will be added to the total amount of the loan, so eventually you’ll have to pay it back, but at least you can get the cash you need to do important renovations.

Loan #2: Hybrid 5-year ARM.

These are very much like conventional 5/1 ARMs, but they offer a 3 percent down payment, a $312,895 maximum mortgage amount and interest rate rises are limited to 2 percent per year with an overall maximum of 6 points during the life of the loan. The program also offers 3-year, 7-year, and 10-year hybrid loans. The big benefit with these loans is that the initial period of interest is a lot less than a standard 30-year fixed rate mortgage.

While I still think the odds are in favor of going with a 30-year mortgage, a 5-year ARM will be a good choice if you’re only going to stay in the home for 5 to 7 years.

Got loan trouble? FHA now offers cash to lenders to help keep you from foreclosing.

FHA is now offering cash incentives to lenders to make sure that if a homeowner falls behind in his or her payments, the lender has a reason to help the homeowner catch up and avoid forbearance agreements or loan modifications. This is an important difference between FHA and subprime lenders.

Other reasons to consider an FHA loan:

  • No prepayment penalties
  • Quicker funding decisions
  • Higher debt-to-income ratios.

It’s terrific that FHA loans carry no prepayment penalties, which happen to be illegal in Illinois but lenders get around that all the time. But FHA loans have always been a pain for lenders because of the paperwork, took too much time, and were expensive compared to conventional loan products. FHA has been working on that, and has now started to streamline the process for lenders and bring down the cost for consumers. FHA also allows you to borrow more against your income, but without raising the interest rate you’ll pay.

For more information about FHA mortgages, log onto the Department of Housing and Urban Development,

Published: May 17, 2005