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Are FHA and VA loans the "new subprime?"

Hawryluk In the wake of the subprime lender fiasco of recent months, where a slew of mortgage companies specializing in providing subprime loans — high risk mortgages granted to individuals who otherwise may not have qualified for a more standard, “A paper” loan — went out of business, there have been considerable changes in the regulations that govern subprime lending, making it more difficult for borrowers who may have been granted a subprime loan in the past to obtain a mortgage.

One side effect of the subprime collapse and consequent restructuring is that FHA and VA loan programs have been receiving more attention, aided in part by standard increases in these programs’ loan limits to $361,000 for a single family home loan for FHA loans in Kitsap County and $417,000 for VA loans.

“Really the VA and FHA hasn’t changed other than their normal increase in loan limits,” said Ryan Christian, branch manager of Countrywide Home Loans Bremerton office. “These loans have always been available but with the guidelines on subprime loans in the past being so loose it was less hassle for the borrowers to obtain financing with the subprime option. So now that that option has changed the FHA and VA loan programs are getting more attention.”

Because FHA and VA programs may also enable would-be homeowners who may lack down payment funds or have a rocky credit record to purchase their home, some people have begun to refer to these loans as the “new subprime.” But how accurate is that statement?

“The guidelines on the majority of the subprime loans have tightened so much that the FHA and VA guidelines allow more borrowers to qualify than most of the subprime loans these days,” said Christian, “so the statement, ‘the new subprime’ really refers to an avenue of obtaining a home loan for borrowers that would not qualify for a conventional loan due to any number of reasons. Eventually the market will correct itself and we’ll see the subprime loans stabilize but until that time FHA and VA will be the best option for a lot of borrowers.”

But, said Val Hawryluk, manager of Silverdale’s Eagle Home Mortgage, these loan programs are not an apples-to-apples replacement for subprime loans, for several important reasons.

“A portion of the past subprime market will qualify for FHA and VA loans,” she said, “but those programs do not allow for stated income loans; the borrowers must document income stability, debt to income ratios and funds available for closing to meet the agency requirements. And not all lenders offer FHA and VA loans.”

Partially as a result of the destabilization of the subprime loan industry, the FHA is working on legislation that will accommodate more of the previous subprime borrowers, reported Hawryluk, although the VA is not currently making any such changes.

For homeowners who may already be shouldering the burden of a subprime loan, an FHA or VA loan may help them get out from under.

“Both FHA and VA are excellent options to bail out of a subprime loan,” said Hawryluk, “and subprime borrowers should be looking at getting out of these loans.”

“Absolutely you can refinance into a FHA or VA loan,” agreed Christian, “but the thing to watch out for is if the current subprime loan has a prepayment penalty because that could cost the homeowner thousands of dollars for breaking the contract before the set time frame.”

And while these loan programs may help fill some of the gaps left by the collapse of so many subprime lenders, the reality is that some borrowers who may have qualified for a subprime loan are simply not going to be able to buy right now.

“The loss of the subprime loans will take a section of the purchasing borrowers out of the market,” said Hawryluk. “In the past, someone with poor credit, unable to document their income and with no down payment could purchase a home. These borrowers will not have access to mortgages without working on these issues in the future.”

But in Hawryluk’s opinion, this is not a bad thing.

“By working to document their income, cleaning up their credit and/or saving for even a 3 percent down payment, these borrowers will still be able to purchase a home — it just may take a bit longer,” she said. “The instant gratification may be delayed… which will get them a safe, secure mortgage at a good rate.”.

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