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FHA Loans: Shopping the Options
“How did you find a lender to give you a mortgage?”
In the years of stringent lending since the 2008 financial crisis, eager buyers with limited down payment money or less than pristine credit have had good reason to probe about sources for an affordable mortgage.
Lending tightened unexpectedly last fall, when the Federal Housing Administration began levying steep finds on big banks that made underwriting errors during the mortgage process.
As a result, J.P. Morgan Chase & Co. and Bank of America Corp. pulled back dramatically from issuing government-backed FHA mortgages and Wells Fargo & Co. raised its minimum credit score on these affordable loans from 600 to 640.
FHA insures loans for first-time homebuyers and homebuyers with lower credit scores who might not otherwise qualify for a loan. FHA-backed loans require a down payment of as little as 3.5 percent and a credit score as low as 580 on a scale of 300 to 850.
New rules in 2015 cut the upfront fee required on FHA loans amount to .5 percent of the amount borrowed from 1.75 percent, promising to make the loan even more popular, observes Keith Gumbinger, vice president of mortgage data site HSH.com.
The federal housing agency now says it will soften some of the penalties that prompted the banks to back away from FHA loans. Until it does, struggling borrowers may have to look beyond big banks to nonbank alternative lenders.
Among the options:
• Nonbanks: Nonbank lenders such as Loan Depot, which don’t take savings deposits from consumers, have been energetically originating FHA loans. FHA loan hopefuls with lower scores may find success with a nonbank lender, says Karan Kaul of the Urban Institute.
• Credit Unions: These not-for-profit organizations originated nearly 8 percent of U.S. mortgages last year, three times the credit union share reported in 2007, according to the Mortgage Bankers Association.
• Community banks: “We advise that borrowers look locally,” says Gumbinger. “Lots of community-based lenders do FHA.”
FHA-alternatives are popping up at big banks, too. In February, Bank of America launched a new mortgage product to compete with FHA-backed loans that lets some borrowers get mortgages with as little as 3 percent down payment.
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