Subprime loan alternatives explored by Congress

Plan to revitalize FHA may provide alternatives to high interest home loans

Owning a home has long been considered the American Dream. While a higher percentage of Americans own homes than ever before, the Dream remains out of reach for millions of people. The problem usually involves a poor credit score, which can prevent would-be buyers from obtaining home loans at a reasonable interest rate. Instead, these buyers are forced to apply for what are known as “subprime loans.” These loans carry higher interest and fees than mortgages offered to people with better credit, and as a result, tend to have higher foreclosure rates. Buying with a subprime mortgage is not the way to healthy credit, nor does it assure buyers that they will continue to have a place to live since meeting the sky-high monthly payments is so difficult.

A bill that is currently in the House of Representatives may offer some help to buyers with lower credit scores. House bill 5121 will offer some new plans to those who otherwise might find purchasing a house beyond their grasp as well as attempt to revamp the decades-old Federal Housing Administration.The FHA was created during the Depression by the Roosevelt administration in order to spur home ownership by backing up mortgages and making them less of a risk to lenders. 

The new bill, known as the Federal Modernization Act, would propose the following:

• Create a new FHA insurance premium schedule, based on risk. The new system would charge borrowers different amounts of insurance based upon their credit. The current system charges the same fee to all borrowers. This new system would create a rate schedule where the risk and the premium were more closely matched than they are under the current system.
• The current system requires a minimum down payment of 3% of the purchase price. The proposed system would allow more flexibility regarding the amount of the down payment. Many people are unable to purchase a home because they don’t have a sufficient down payment. Changing this requirement would help.
• Raise loan limits. FHA loan limits vary by region; the amount for California loans, for instance, would be higher than for loans offered in North Dakota. The new bill would raise loan limits by varying amounts in all parts of the country.
• Loan limits for manufactured housing would also increase across the country.
• The new bill would change the way that condominiums are insured and would now regard them as a single family unit instead of a multi-family unit. This would make it much easier for buyers to obtain an FHA loan for condominiums.

It remains to be seen if the House will pass the bill. The Senate has yet to introduce a bill along these lines; until it does so, this bill remains in limbo. Still there are very few members of Congress that wouldn’t like to see more members of the districts able to buy their homes. Given that, this bill has a high likelihood of eventually passing both houses of Congress and becoming law. That would be great for those buyers who, up until now, have had little chance of buying their own property.