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My Sub-prime Loan Crashed - What About Fha?
By admin | January 20, 2008
Unfortunately due to the implosion of the sub-prime mortgage business, many home buyers and homeowners are having to ask this question. Many more will be asking. For most, FHA is their only option. So what are the similarities and differences between sub-prime and FHA mortgages?
I could write a good sized book
First, let’s talk about the similarities. Both typically involve borrowers with less than perfect credit. Both also usually involve high LTVs, generally 95% and above. Both can do refinances and purchases. And obviously both gauge a borrower’s ability to repay a loan based on their credit history. But that’s about it for similarities.
Now lets talk about the big differences, but first I need to set some parameters. This comparison is from the sub-prime of old even though it no longer operates like it used to. This will allow people who were caught up in the wake of the sub-prime tsunami to better understand their current options or see if they have any under FHA. Keep in mind that every sub-prime lender had different programs so I will speak to “average programs”.
Sub-prime lenders focused their programs heavily and strictly on mid credit scores. Most would do 100% with a 580 mid score. The very, very few left now require a 620 mid score. Many had no seasoning after a bankruptcy. Some had seasoning requirements of as little as 1 day. Nearly all now have 1 to 2 years required after a bankruptcy to get a 90% or 100% loan depending on credit score. FHA has NO SCORE REQUIREMENTS and requires 2 years from the discharge of a Chapter 7 but no seasoning for Chapter 13s. FHA primarily looks at recent pay history on trade lines. FHA will also allow “alternative trades” like rent, utilities, etc. that don’t show up on a credit report, but were not late in the last 12 months. Very few sub-prime lenders allowed these trades. You can also go through a manual underwrite FHA loan for exceptions. Some FHA loans get approved with exceptions, supported by special and detailed documentation and explanations provided to an Underwriter.
Most sub-prime lenders had numerous “alternative income docs” including Stated income and No Doc loans. These are all gone for 90% or higher LTVs. All FHA loans are full doc, in other words W-2s, pay stubs and/or tax returns. FHA will do 97% loans (95% for refi) combined with a 3% gift
FHA loans have a cap of just over $200K in most areas with exceptions in high cost areas. Sub-prime lenders would do loans into the millions.
Lastly, FHA rates are much lower than sub-prime rates, although FHA loans require Mortgage Insurance on loans over 80%. For the few sub-prime lenders left, rates are very high (well into double digits for high LTVs vs. 6’s for FHA).
So there you have it. There are tons of other variables that you can run across. If you had a sub-prime loan go south or you fear yours will never close, pick up the phone and call an FHA approved mortgage broker. You never know.
George is a mortgage originator specializing in FHA mortgages. His website is full of Free information about the mortgage process along with mortgage terms and FAQs. Check it out at Alabama FHA Mortgages
Tags: FHA mortgages, Home refinance, mortgages, New home loan, sub-prime mortgages
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Topics: Finance |