FHA loans have become extremely popular in recent months because they are now the only traditional lending product that allows borrowers to make a low down payment (as low as 3.5% instead of the 20% most lenders require these days). In fact, a third of all mortgages created are now FHA insured.

The growth of FHA mortgages has resulted in fraud and what some call “inappropriate lending practices.” Basically, a lot of new customers are not making more than a single mortgage payment. They take out the FHA loan and never pay their mortgage bills, forcing the lender to go through a time-consuming and costly foreclosure process. These early defaults are putting the FHA program in a bad light and causing some nay-sayers to urge tighter lending standards.

The Washington Post explains:

“Once again, thousands of borrowers are getting loans they do not stand a chance of repaying. Only now, unlike in the subprime meltdown, Congress would have to bail out the lenders if the FHA cannot make good on guarantees from its existing reserves. And those once-robust reserves are showing signs of stress, raising the possibility that taxpayers may have to pick up the tab for the first time since the agency was established in 1934.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.”

I’m not against policies to prevent fraud, but if the FHA program sets tighter standards, we all suffer. Unfortunately, these FHA loans are the only option for thousands of financially stable borrowers. Traditional banks just aren’t providing the kind of creative financing mortgages your responsible, everyday family needs. If the FHA low down payment program ceases to exist, the mortgage crisis will only get worse.

See Also:

FHA Mortgage Guide

Answers to Common FHA Questions

Tags | creative financing, FHA, low down payment loans