SANTA CRUZ (April 24, 2010) - Despite the stigma associated with FHA insured loans, home purchases with FHA loans continue to gain in popularity. FHA loans were created by our government in the early 1930s to help our country come out of the Great Depression. Prior to FHA loans, homebuyers had to rely on banks for loans. At that time, banks required 50 percent down payment, only offered short term financing and to top it off, the loans had a demand feature which meant the bank could call them due anytime!

FHA loans changed all of that. Homebuyers could then get into a home with a low down payment and fixed rate mortgages available that had terms out for up to 25 years that kept the payments affordable. The increased homeownership with FHA loans helped lead our country out of that depression. FHA loans remained popular in middle America, where home prices were on the order of half of what they were in California. In 2007, when a median priced home in Santa Cruz County reached $780,000, the maximum FHA loan was a mere $362,000. Due to our high prices and the $362,000 loan limit, FHA loans provided little help to homebuyers here on the Central Coast of California. Additionally, FHA loans used to require a pest report and clearance as well as a well and septic system report for rural properties which caused some buyers and sellers to steer away from FHA loans.

In February of 2008 President Bush, in an attempt to stimulate our economy, completely changed the rules for FHA loans. The biggest change that was put into place was to increase the maximum loan amount for these loans. Today that limit is $729,750. This loan program allows a borrower to buy a home with just 3.5 percent down and provides a competitive (with conventional loans) 30 year fixed rate mortgage. No longer are the various reports required unless the buyer requests them or the appraiser sees something like an obvious roof leak or a health or safety issue.

The other misconception about FHA loans is that they are paperwork intensive and take much longer to complete than conventional financing. This is just not so. We recently experienced a situation with a home purchase wherein the first buyer backed out and the buyer in second position was able to step up if he could close escrow in short order. The borrower met with a mortgage consultant here on day #1, Wednesday; the loan was reviewed and pre-approved on Thursday. The appraisal was ordered on that day and completed on Monday. By Wednesday the underwriter had the loan fully approved. We prepared the loan documents on Thursday and the borrower signed them on Friday. We funded the loan on Tuesday which was business day #10 and this transaction then closed on Wednesday.

We certainly do not recommend that agents write their escrows for 10 days but if everything falls into place perfectly, it is possible to close an FHA transaction or a conventional transaction in 10 business days!

This column is written every Saturday 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.