Government-backed loans becoming more common for Fredericksburg-area home buyers

BY BILL FREEHLING

Date published: 9/20/2008

BY BILL FREEHLING

Fredericksburg-area home buyers are increasingly turning to mortgages backed by the federal government as conventional bank financing has dried up.

About 35 percent of the 353 homes purchased in the Fredericksburg area in August were financed with loans backed by the Federal Housing Administration, according to data from Metropolitan Regional Information Systems Inc.

That was the highest percentage of FHA-insured loans for any month this decade. It was also the first month since 2000 in which FHA-backed loans were more commonly used for home purchases than conventional mortgages.

That's a trend sweeping the nation as banks grow increasingly conservative about lending practices. Many people are also refinancing their adjustable-rate mortgages into FHA-backed fixed mortgages.

In conventional loans, banks sell the mortgage to Fannie Mae or Freddie Mac, but those institutions are now buying only the safest loans. The only borrowers who qualify for these conventional loans are those who have topnotch credit scores and can make down payments of at least 5 percent and often more.

"If you're a borrower who has little money to put down, then FHA is the only game in town," said Guy Cecala, publisher of trade publication Inside Mortgage Finance.

With FHA-backed loans, the federal government isn't actually lending the money. Rather, it's insuring that the lender will be repaid in event of default.

Borrowers must put down at least 3 percent to qualify for an FHA-backed loan, and that will soon go to 3.5 percent. The FHA charges a 1.5 percent upfront mortgage insurance fee, plus an annual fee of about 0.5 percent, which is paid monthly in the mortgage payment. The FHA is expected to raise its upfront fee to 1.75 percent in the coming months.

That means that homeowners taking out a $250,000 FHA-backed loan would have to pay $4,375 upfront and $104 a month to insure the mortgage. The monthly insurance premiums end after the borrower has paid off a certain percentage of the loan.

In addition, Cecala said, borrowers who get FHA-insured loans must go through a lengthy bureaucratic process that examines their credit history and the condition of the house being purchased.

Date published: 9/20/2008