Why Have FHA Loans Become So Popular

During the housing boom, FHA loans were not so widely used. In 2007, FHA loans only made up about 3% of all loans funded nationally. During that time, FHA loans were not as attractive as conventional loans due to FHA’s loan limit restrictions, higher mortgage insurance costs and stricter appraisal guidelines. At that time, conventional loan products offered interest only options, 100% financing choices and low doc alternatives that tended to outshine the benefits offered by FHA loans. Today, just about all of the loan products that previously competed with FHA loans are no longer available. Lenders now consider the previous products to be too risky and many people accuse those loan products (especially subprime products) as the root cause of the financial crisis and ultimately responsible for undermining the entire world economy.

Today, one out of every two loans originated in the United States is an FHA Loan! This is because FHA loans have become easier to qualify for while also offering a lower down payment than conventional loans. Another factor that has made FHA loans more competitive is the fact that real estate values have decreased, yet FHA loan limits remain unchanged. Therefore, many more homes are eligible for FHA financing than ever before based on the maximum loan sizes available in relation to typical sales prices.