The subprime market, which has been blamed for sparking the current financial and credit crisis, is pretty much dead and gone. FHA home loans have now become the primary home financing tool for lenders nationally.  FHA has upheld their promise to lend to people with little money for down payments and credit blemishes.

The FHA requires a 3 percent down payment (due to raise to 3.5% beginning next January), compared with 20 percent for some conventional mortgages. The FHA also doesn’t require a minimum credit score, although lenders typically have minimum standards in place. But these minimums are nowhere near as stringent as those of conventional loans.  For a conventional loan, you need a credit score of at least 660 if you’re putting 20% down and at least 700 if you have less than 20% startup equity. Most lenders who have a minimum credit score requirement for FHA loans will approve someone who has a score of as low as 500, but typically the required minimum is 580. But, that’s a lot less than what conventional lenders are asking for.

On top of that, the government has substantially increased the amount of money that can be borrowed through FHA loans, And, for the first time, FHA is allowing homeowners who are behind on their monthly payments to refinance through the FHA.  Nationally, the FHA is insuring more than $24 billion in mortgages a month, up from about $6 billion a month a year ago, a figure that includes purchases and refinances. In metro Atlanta, the number of FHA loans is on pace to more than double this year.

“All of a sudden, FHA has come back in a big way and is a much bigger piece of the pie,” said Walter Moody, a Macon broker who is president of the Georgia Association of Mortgage Brokers.  Jan Wagner, president of Canton Street Mortgage in Roswell, said her company began handling FHA loans only this year. But now, nearly one in three of her company’s mortgages are backed by the FHA.

Unlike the subprime market, FHA has measures in place to minimize lender risk for foreclosure.  FHA mortgage lenders continue to praise HUD’s commitment to homeownership.  “We have consistent guidelines in that we do require borrowers to document income and their ability to pay,” said Charles Gardner, director of the FHA’s Atlanta homeownership center.  Subprime loans would allow people to borrow based on what they claimed their incomes were. The Federal Housing Administration (FHA), an arm of the U.S. Department of Housing and Development (HUD), requires borrowers to verify income and submit income tax records. Like conventional loans, FHA is a full documentation loan.

FHA is still the best option for cash-strapped first-time buyers and those who have a credit score of less than 700. Fill out the free loan quote form to see if you qualify for a FHA purchase loan or refinance. Interest rates are low right now, so it’s a good time to refinance, especially if you currently have a subprime adjustable rate mortgage (ARM) or exotic hybrid ARM interest only or negative amortization loan.

The House on Thursday passed a contentious foreclosure-prevention package, which still faces a veto threat from the White House and an uncertain fate in the Senate.  In a 266-154 vote - with 39 Republicans voting in favor - lawmakers approved a proposal, to let the FHA insure up to $300 billion in new loans over four years if FHA lenders agree to reduce the mortgage principal.

To qualify, the FHA mortgage lender would have to cut the debt to no more than 85% of a home’s current appraised value. If the FHA refinance loans went into default, the FHA would pay the home loan lender the remaining principal owed.

While 1.4 million loans are likely to be eligible for such a program, the Congressional Budget Office estimates such a measure would end up insuring 500,000 borrowers. The CBO estimates the FHA expansion program would cost taxpayers $1.7 billion. “This bill is very time limited and limited in specifics to a subset of mortgages and meant to mitigate a market failure,” Frank said during the floor debate on Thursday.

Opponents of the FHA expansion contend it’s a bailout for lenders, investors and “speculators” who took on imprudent risk. And because participation in the program would be voluntary on the part of lenders, critics contend lenders would only unload their riskiest loans into the federally backed program.

Supporters note that the program is limited to loans for owner-occupied residents, not speculators. They also make the case that lenders and investors would be taking a loss on every loan, and that the borrower would be paying higher-than-usual premiums to the FHA to insure the loan and would share equity in their home with the government. “No borrower who goes through this process will say at the end of it, ‘Boy, that was fun. Where do I buy a ticket to get back on Space Mountain?” Frank said.

Supporters also say if the borrower still can’t afford the loan when it’s written down to 85% of appraised value, their loan won’t qualify for the program. If the bill is a bailout for anyone, they say, it’s a bailout for communities across the country, which suffer when home values and property taxes go down because of foreclosures.