FHA may be new best bet for “sub-prime” mortgage

Sub-prime lenders have largely replaced the FHA (Federal Housing Administration) in providing mortgages to less than prime-risk borrowers because they offered better terms and less paperwork. But with many of those sub-prime loans in default or foreclosure, sub-prime lenders have pulled in their horns. No-down-payment loans have largely disappeared from the sub-prime market, says the Wall Street Journal. The new minimum is now 5% down. And interest terms have become les favorable.

This makes the FHA — which was set up during the 30’s to help low and middle-income home buyers qualify for low-interest mortgages — look a lot more attractive. The FHA does not issue mortgages itself but insures those issued by others against default. They require a minimum down payment of only 3% to insure a mortgage.

FHA loans still require a lot of paperwork (although they are looking into streamlining that) and you have to pay a premium on your interest rate for the insurance, but in the end you will probably get a better deal than you would from anyone offering an uninsured amount.

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