SANTA CRUZ (August 10, 2008) - Thanks to Congress, the Federal Housing Administration (FHA) has added new life into the mortgage industry here in Santa Cruz County. Prior to the President’s signing of the Economic Stimulus Package in February of this year, the maximum loan that FHA would insure was $362,790. With Santa Cruz County’s median home price peaking at $757,000 last year, the smaller FHA loans did not play a role at all here. The February bill temporarily (until 12/31/2008) raised the FHA maximum loan amount to $729,750. With a stroke of the pen FHA became a significant player here in Santa Cruz.

With good 30 year fixed rates, 100 percent financing options and less than stellar credit accepted, FHA loans have given hope to homebuyers and homeowners seeking financing. The one notable requirement of FHA is that borrowers’ incomes must be fully documented, which has become standard operating procedure for virtually all conventional and government mortgages.

100 percent financing is still currently available by utilizing the combination of an FHA loan and a gift from either a relative or an approved non-profit  organization. This popular program has allowed borrowers to obtain a 97 percent loan through FHA and then get the 3 percent balance from a seller funded, non profit, down payment assistance program.

On July 30 the President signed into law the Housing and Economic Recovery Act of 2008. This is another bill that Congress passed this year in an attempt to breathe new life into the distressed real estate and mortgage markets. The bill provides many benefits to homeowners and first time homebuyers. It is expected to help some 400,000 families refinance out of a potential foreclosure situation, provide up to a $7500 tax credit for first time homebuyers, enhance mortgage disclosures and offers many other benefits. Additionally, it provides much needed financial backing to Fannie Mae and Freddie Mac, the nation’s largest investors in home loans.

The good news is that the new bill will permanently raise the FHA loan limit to $625,500 (at least through 2010) for high cost areas such as Santa Cruz (Fannie Mae and Freddie Mac limits will also go up to this level) which may not be as good as the current limit but it is a lot better than reverting back to the $362,790 level. Another benefit is that FHA will be ‘streamlining’ condo project approvals.

While it is billed as an enhancement for the FHA program, there are also some unwelcome changes coming. Since research has shown that those who purchased a home with no down payment with an FHA loan have a default rate that is three times higher than those who purchased a home with some of their own money, this option is scheduled to go away on October 1. That is, unless another bill before Congress changes that.

Additionally, the minimum borrower cash investment will go up to 3.5 percent.

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.