FHA new “best bet” for low down payment mortgages?

I don’t know how many times I heard “everything has changed” after 9-11, but I think of that when I look at the mortgage market after the subprime bubble burst. It’s still not clear where it is going to end up, but it seems as if one of the old stalwarts is getting back into the game.

The Federal Housing Administration (FHA) was started in the depression to help people buy homes by insuring their mortgages, but it has become largely irrelevant lately with Fannie Mae and Freddie Mac– both government sponsored private corporations — becoming the prime players in that market. But with Fannie and Freddie stuck in the mire of non performing loans, the FHA suddenly looks like the best bet for many borrowers.

While Fannie and Freddie have upped their minimum down payment in many areas, the FHA is sticking to its established national requirements, which means that you can put down as little as 3%. In addition, FHA loans are often written at lower interest rates, including insurance.

The Wall Street Journal did a comparison using a typical young borrower buying a $325,000 single family house. The required minimum FHA down payment was under $10,000 while Fannie and Freddie wanted more than $16,000. FHA interest rate was 6%, lower than the Fannie and Freddie’s 6.37%. Monthly payments were $70 lower with FHA, even though the total loan was higher.

FHA requires 1.5% of loan value up front, and 0.5% per year based on the outstanding loan balance, but if you make payments for five years and loan drops below 78% of your house’s value, the 0.5% ends.

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