SANTA CRUZ (May 4, 2008) - The Federal Housing Administration (FHA) is the world’s largest mortgage insurer in the world. Selected and approved banks and mortgage companies originate, approve, fund and service FHA loans. The FHA insures these loans so that lenders do not have to worry about whether or not there will be a market to sell these loans.

FHA loans have been popular throughout the United States where home prices were low enough to take advantage of the $362,000 maximum loan amount that FHA previously allowed. With the President signing the Economic Stimulus package in February, the FHA limit was increased to $729,750 for high priced areas like Santa Cruz. This potentially brings the FHA loan within reach of the majority of homebuyers and homeowners in Santa Cruz County. Unfortunately, this higher loan limit will go away as it is scheduled to sunset on December 31 of this year, when the limit is scheduled to go back to the $362,000 level. We all hope that Congress will grant an extension of this incredible opportunity.

According to a recent article in Forbes magazine, FHA loans had a 12 percent market share of mortgages in the U.S. in 1994. By the subprime era of 2005-2006, FHA loans made had only a 1.8 percent market share. This was due to the fact that subprime mortgages filled the need for those borrowers with less than ideal credit and small down payments and much less stringent underwriting than FHA. In 2007, 425,000 FHA loans were originated and that number is expected to more than double to 1,100,000 loans in 2008. FHA appears to be filling the need that the subprime lenders had been filling prior to the mortgage meltdown.

The obvious benefits to the FHA loan include down payments as low as 3 percent, which can be all gift, competitive 30 year fixed rates, and the fact that borrowers can qualify for an FHA loan without stellar credit.

Perhaps one of the most important aspects of an FHA loan is that co-signers can help the primary occupants qualify. That means, for example,  that a borrower who does not make enough money to qualify for the mortgage can get help from a family member who is willing to sign on as a co-borrower. Conventional mortgages used to allow this but no longer do.

The one aspect of an FHA loan that is important to note is that income documentation is required; FHA does not accept ‘stated income’ loans. Although there are exceptions, the borrowers’ debt - to - income (DTI) ratio needs to be below 43 percent.

Not all lenders or mortgage brokers are approved or can be approved to do FHA loans. The approval process is strict, it requires audited financial statements and requires the loan originators to be W-2 employees of the lender. Be sure you speak with a knowledgeable and approved FHA mortgage professional before you make a decision regarding refinancing or purchasing a home.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.