For many years, a mortgage loan guaranteed by the Federal Housing Administration (FHA) was not a particularly hot ticket in major real estate markets. FHA loans were seen as so burdensome and detailed that, according to Bill Smalley, a loan officer with Mason McDuffie Mortgage Corporation, San Francisco, “a whole generation of agents came into the business not knowing anything about them.” Agents should be aware that in the current market, an FHA loan may be, as Smalley says, “the only game in town.” What Is an FHA Loan? An FHA loan is offered by a conventional lender, but the government agrees to insure the loan, meaning less risk for the lender in case the borrower defaults. FHA loans are attractive to buyers as well, as they require lower down payments and are available to those with less than perfect credit. The FHA loan program operates with “conforming loan limits,” the guideline price for an FHA loan. The maximum loan limits differ for virtually every county in the United States, and can be raised or lowered by the Department of Housing and Urban Development (HUD) according to local home values. The most common FHA loan is the FHA 203(b) program, which backs loans for common one-to-four-member family units at 15-year or 30-year terms. HUD also offers what it calls the 203(k) “Streamline” program for financing an additional $35,000 in repairs or home improvements before moving in. Congress in 2007 temporarily raised the maximum loan limit in certain regional markets to as high as $729,500, and eliminated the need for a down payment for certain buyers. In 2009, the FHA loan limits will decrease to a permanent level of $271,050 in lowcost areas, up to a maximum of $625,500 in particularly expensive markets. The new laws also require borrowers to put down 3.5 percent of the loan as a down payment, up from 3 percent, and ban Sellers from contributing any funds or incentives to the down payment. The FHA has been expanding its efforts to back more loans, including a guarantee of $300 billion in new loans under the “Hope for Homeowners” program. The program enables homeowners to refinance into FHA-backed loans, insuring the home for 96.5 percent of its original value. FHA loans currently account for 26 percent of all mortgages issued nationwide, up from 4 percent in 2007. How to Help Buyers According to Smalley, agents can assist buyers in obtaining FHA financing, but their unfamiliarity with the loan means they “don’t have common sense guidelines to work with.” Smalley’s guidelines include the following: * Help the buyer with paperwork. FHA loans require more paperwork than conventional loans, including the following information: all addresses the borrower has lived at for two years, two years’ worth of income tax returns, gross monthly salary, employer information, and W-2s going back two years. * Apply for the loan. Advise the buyer to shop around among several lenders, to ask for FHA-backed loans up front, and to verify credit scores prior to application. * Shop for the home. In order for a home to qualify for FHA backing, it has to be appraised by an FHA representative. This has often been the biggest sticking point for agents against using the FHA loan, according to Derrick Debose, an agent with KellerWilliams in Oakland. Agents often feel FHA appraisers go out of their way to find problems with a particular property, which can hold up the sale, he says. “Take your prospect out to the property and go over every particular problem you find before calling the appraiser,” he says. “Head off any problems before they get to a point [that can derail a deal].” The FHA has also greatly loosened its guidelines for appraisers in recent years, such as eliminating the need to approve minor repairs prior to the sale. * Lock in the insurance rate. FHAbacked loans require a monthly mortgage insurance premium payment that is folded in to the cost of the loan. This translates into a one-half percent increase on the monthly payment, but the buyer will pay the extra amount for only five years or until 78 percent of the home’s value is paid off, whichever comes first. * Closing costs. FHA-backed loans have a lengthy list of items included in the closing costs, such as attorney’s fees, appraisal fees, inspection fees, title insurance and title examination fees, property survey fees, and credit reports. The good news is that the seller can pay all other closing costs not considered “allowable.” Educate your buyer on what their county’s rules are regarding FHA loan closing costs, as they can differ from region to region. * Closing time. The average closing of an FHA-backed mortgage is 30 days. In recent years, FHA loans closed more slowly than direct loans, some of which could process in as little as 14 to 15 days. Now, Smalley says, conventional lenders are taking as much as 45 days to process loans, making the FHA products much more attractive.