FHA continues to be the largest insurer of residential loans in the entire world. The emergence of the FHA (Federal Housing Administration) agency out of the depths of The Great Depression (1929 – 1939) in 1934 continues to play a major role in the funding and acquisition of properties even today. Just like how FHA and the FDIC were created to help save the banking system and housing market during the busting 1930’s decade, these two government entities were enhanced to save and boost the financial and real estate markets yet again in 2008 with increased insurance limits (i.e., FDIC increased from $100,000 to $250,000 in bank insurance account protection and FHA loan limits were increased by a few hundred thousand dollars in some of the pricier county regions, especially in California).
Over the past 10 years, the vast majority of owner-occupied residential loans funded were either some form of government-backed or insured type of loan. Prior to 2008, a high percentage of conventional or conforming loans weren’t government insured or purchased in the secondary markets by government agencies like FHA, VA, or USDA for rural residential properties. Or, tens of millions of residential loans were acquired directly by the two largest secondary market investors named Fannie Mae and Freddie Mac that used to be more private than public before being bailed out by the U.S. Treasury and placed into conservatorship with the Federal Housing Finance Agency. Now, the odds are quite high that most residential loans for owner-occupants below the maximum ceiling loan limit are, directly or indirectly, funded and / or insured through the federal government.
From Subprime Adjustable to “Subprime” Government Loans
The real estate and financial bubbles began popping in 2007 in 2008 as the number of distressed and foreclosed mortgages skyrocketed. A high percentage of borrowers, especially in California, had purchased homes between 2000 and 2007 using various types of “stated income” adjustable rate mortgages. Some of the most popular adjustable rate loan products offered were the 30 and 40-year amortized mortgage loans were starting rates near 1% or 1.25%. These mortgage loans usually provided borrowers with three or four different monthly payment options such as follows:
1. Minimum payment based upon the start rate of 1% or 1.25% (or “negative amortization” because the lowest payment selected didn’t pay the entire principal and interest amount due and the original loan balance grew larger); 2. Interest only (the principal amount neither increased nor decreased); or 3. Principal and interest (the borrower paid the fully amortizing loan amount that would eventually pay off the loan in 40 or 30 years).
Once the Federal Reserve started increasing their Fed Funds Rate from a low of 1% in 2004 to 5.25% with 17 separate rate hikes in just that two year span of time, then the payments for many of these adjustable rate mortgages began to double or triple in size. Because California has some of the most expensive properties in the world, a very high number of borrowers saw their monthly home loans increase so high on their $300,000, $500,000, or $1,000,000 plus loan amounts that they began to default on their mortgages at a record pace.
While most types of negative amortization or other types of adjustable mortgages were eliminated after 2008, subprime credit, or EZ Doc-type loans, do still exist by way of government agency loans more so than private bank loans. To bail out the housing market once again, the federal government eased up their mortgage underwriting guidelines and took interest rates to all-time record lows so that more people could qualify for both purchase and refinance loans. It is the availability of capital that drives the housing markets through the various boom and bust cycles as we’ve all seen in recent years with fixed rate loans hovering in the high 3% to low 5% rate ranges.
FHA Loan Qualifying Guidelines
In some California regions, it has been claimed that upwards of 95% to 97% of all residential loans funded for owner-occupied homes were associated with some sort of a government program. Coincidentally, FHA offers most of their down payment ranges somewhere near this same 95% to 97% loan-to-value (LTV) range with 96.5% being the most often selected LTV range.
Let’s take a closer look at some of the FHA underwriting approval allowances (subject to change):
- Down payments as low as 3.5% with a 580 FICO score.
- Lower FICO credit scores in the 500 to 579 range may require a 10% down payment.
- Family members and sellers may assist with some of the closing costs.
- Debt-to-income ratios may be as high as 43% (Fannie Mae loans allow up to 50% DTI).
- Past foreclosures, bankruptcies, and other seriously negative credit issues in recent years may still be acceptable.
- FHA doesn’t necessarily require that the new home buyer have any cash reserves left after the purchase of the home.
There are 58 counties in the state of California. Home prices may vary from $200,000 to $200 million +, depending upon the county region. The more expensive metropolitan areas that are usually located fairly close to the Pacific Ocean tend to have the highest prices. As a result, the maximum loan limit allowances near the beach are likelier to be much higher than inland regions. As of January 1, 2018, the maximum FHA loan limits for residential properties (one to four units) is as follows in each of these selected counties below:
Maximum FHA Loan Limits in California Counties
| County
Alameda |
1-Family
$679,650 |
2-Family
$870,225 |
3-Family
$1,051,875 |
4-Family
$1,307,175 |
There are a number of California real estate agents who specialize in working with FHA loan clients. Unlike years past, today’s FHA loans can close escrow much quicker than the more sluggish FHA loans back in the 1980’s or 1990’s. Please continue to learn more about the incredible opportunities for agents and clients seeking FHA loans for purchase, sale, or loan refinancing transactions.
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