FHA, VA Account for One in Three New Mortgages

Government-insured mortgages, those backed by the FHA or VA, are at their highest rate in almost two decades, accounting for more than one mortgage application in three.

The Mortgage Bankers Association reports that FHA and VA loans accounted for 35.9 percent of all mortgage applications in June, the highest rate since November 1990. FHA and VA loans made up as few as 5.8 percent of the total as recently as August 2005.

Little or no down payment

The two government-backed loan programs are growing increasingly popular as the only places to obtain a mortgage with little money down in the current tight credit market. Whereas private lenders are commonly seeking 20 percent down, FHA mortgages can be had for as little as 3.5 percent down and VA mortgages continue to offer a zero percent down option.

Conventional mortgages also tend to have higher credit requirements, particularly for mortgages requiring private mortgage insurance, i.e., those with less than 20 percent down.

The total reported by the MBA includes both mortgage applications for home purchases and for refinancing. The low down payment requirements have always made FHA mortgages attractive to some purchasers.

FHA mortgages have added charges

However, they do have their downsides. For one thing, they can be more expensive than a conventional mortgage. To cover the cost of the government insuring the loan, borrowers pay an up-front insurance premium of 1.5 percent of the purchase price at the time of closing. In addition, they also pay an additional monthly insurance premium at an annual rate of 0.5 percent.

FHA loans also have fairly modest limits on their loan amounts, as low as $270,000 in many markets up to about $720,000 in pricier areas. The sharp decline in the housing market has made these limits less restrictive, however, particularly over the past year. For qualifying veterans, VA loans have considerably less stringent maximums.

Many still hope to minimize down payment

A recent survey of persons contemplating a home purchase in the next two years illustrates the appeal of the low down payments required by the government programs. Zillow.com reports that half of all potential home buyers plan to put down 10 percent or less of the purchase price when buying a home.

Fully 17 percent still expect to put down zero percent, despite the fact such loans have practically disappeared except for the VA program; the survey did not indicate how many of those respondents might be qualifying veterans. Only one-fifth said they expected to put down 20 percent or more.