By Bob Stahl, MyPhoenixMLS.com, for REALTOR.com®

The Dow recently closed above 10,000 – the first time the stock market’s biggest index closed that high since it tumbled from 11,000 last October. And while Bank of America posted a $1 billion quarterly loss last week, many of the country’s other major financial institutions posted healthy profits. Yet even amid that good news, lenders continue to hold tight to their money; borrowing is still far more difficult than it was several years ago (which, to a certain extent, is probably a good thing).

Gone are the days of the no-down loan

At the height of the real estate/mortgage-backed securities boom, demand for mortgage-backed securities was so ferocious that banks couldn’t lend money quickly enough. We’ve all heard of the irresponsible kinds of loans that banks made – $500,000 mortgages to people with $50,000 incomes, stated income loans for people with credit scores of 600, interest-only adjustable rate mortgages with initial interest rates of 1%, the list goes on.

When Wall Street collapsed a year ago, so did those kinds of crazy loans – which is a good thing. But banks went overboard. Afraid of waking up with too little collateral for their debt obligations, banks clamped down on lending – commercial paper markets, some of the safest around, even froze for a while last fall. Since then, lenders have eased up considerably, but credit is still tight. To qualify for a mortgage with a traditional lender these days, you’ll probably need a credit score of at least 680, if not 700, and at least a 10% ¬– if not 15 or 20% – down payment.

So what’s a homebuyer to do?

If you’re a first-time homebuyer, or you’re selling your current home but don’t have a lot of equity built up, thinking about saving 20% of the value of your next home can seem like a tall order – that’s $34,800 on the national average home price of $174,000. Even if you can save $500 a month on top of your rent payment, it could take you 5 or 6 years to save a down payment.

Fortunately, you may have another option.

“90% of loans originated now in Greater Phoenix are FHA loans,” a mortgage broker friend told me the other day. I imagine the percentage is similar in other parts of the country (where home prices fall within the FHA’s limits, at least).

FHA saves the day

That’s because FHA-backed mortgages still feature a 96.5% loan-to-value option, meaning that you can borrow as much as 96.5% of the value of the home you’re buying. And, your 3.5% down payment can come from a family member or your employer (“gifted” down payments are typically not allowed by conventional lenders).

The FHA’s 203(b) Mortgage Insurance program “provides mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.” Generally, to qualify for an FHA loan you must:

• Meet standard FHA credit qualifications, which are often more relaxed than conventional mortgage qualifications. Qualifications include not having a bankruptcy or foreclosure on your record within the last three years.
• Purchase a home priced within the FHA loan limits (to find out the limit in your area, visit https://entp.hud.gov/idapp/html/hicostlook.cfm).

Other down payment options

Doug Hill wrote a great post earlier this month about the disappearance of down payment assistance programs, which were outlawed by Congress on October 1, 2008. But many cities, counties, and states have other down payment assistance options available – including stimulus money for purchases in neighborhoods heavily affected by foreclosures. Visit http://www.hud.gov/buying/localbuying.cfm for a list of down payment assistance programs in your area.

The upshot

The bottom line is that you don’t need to squirrel away10, 15, or 20% of your next home’s value in cash. With an FHA-backed mortgage, you can buy a home with 3.5% down, and the sources of that 3.5% are flexible. Combined with the first-time homebuyer’s tax credit, set to expire on November 30, and prices that are still relatively affordable, now may well be a great time to buy.

By Bob Stahl, MyPhoenixMLS.com, for REALTOR.com®

The Dow recently closed above 10,000 – the first time the stock market’s biggest index closed that high since it tumbled from 11,000 last October. And while Bank of America posted a $1 billion quarterly loss last week, many of the country’s other major financial institutions posted healthy profits. Yet even amid that good news, lenders continue to hold tight to their money; borrowing is still far more difficult than it was several years ago (which, to a certain extent, is probably a good thing).

Gone are the days of the no-down loan

At the height of the real estate/mortgage-backed securities boom, demand for mortgage-backed securities was so ferocious that banks couldn’t lend money quickly enough. We’ve all heard of the irresponsible kinds of loans that banks made – $500,000 mortgages to people with $50,000 incomes, stated income loans for people with credit scores of 600, interest-only adjustable rate mortgages with initial interest rates of 1%, the list goes on.

When Wall Street collapsed a year ago, so did those kinds of crazy loans – which is a good thing. But banks went overboard. Afraid of waking up with too little collateral for their debt obligations, banks clamped down on lending – commercial paper markets, some of the safest around, even froze for a while last fall. Since then, lenders have eased up considerably, but credit is still tight. To qualify for a mortgage with a traditional lender these days, you’ll probably need a credit score of at least 680, if not 700, and at least a 10% ¬– if not 15 or 20% – down payment.

So what’s a homebuyer to do?

If you’re a first-time homebuyer, or you’re selling your current home but don’t have a lot of equity built up, thinking about saving 20% of the value of your next home can seem like a tall order – that’s $34,800 on the national average home price of $174,000. Even if you can save $500 a month on top of your rent payment, it could take you 5 or 6 years to save a down payment.

Fortunately, you may have another option.

“90% of loans originated now in Greater Phoenix are FHA loans,” a mortgage broker friend told me the other day. I imagine the percentage is similar in other parts of the country (where home prices fall within the FHA’s limits, at least).

FHA saves the day

That’s because FHA-backed mortgages still feature a 96.5% loan-to-value option, meaning that you can borrow as much as 96.5% of the value of the home you’re buying. And, your 3.5% down payment can come from a family member or your employer (“gifted” down payments are typically not allowed by conventional lenders).

The FHA’s 203(b) Mortgage Insurance program “provides mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.” Generally, to qualify for an FHA loan you must:

• Meet standard FHA credit qualifications, which are often more relaxed than conventional mortgage qualifications. Qualifications include not having a bankruptcy or foreclosure on your record within the last three years.
• Purchase a home priced within the FHA loan limits (to find out the limit in your area, visit https://entp.hud.gov/idapp/html/hicostlook.cfm).

Other down payment options

Doug Hill wrote a great post earlier this month about the disappearance of down payment assistance programs, which were outlawed by Congress on October 1, 2008. But many cities, counties, and states have other down payment assistance options available – including stimulus money for purchases in neighborhoods heavily affected by foreclosures. Visit http://www.hud.gov/buying/localbuying.cfm for a list of down payment assistance programs in your area.

The upshot

The bottom line is that you don’t need to squirrel away10, 15, or 20% of your next home’s value in cash. With an FHA-backed mortgage, you can buy a home with 3.5% down, and the sources of that 3.5% are flexible. Combined with the first-time homebuyer’s tax credit, set to expire on November 30, and prices that are still relatively affordable, now may well be a great time to buy.