If you had to pick the biggest real estate success during the past year, the winner might surprise a lot of people. By every standard it's the FHA loan program.

While many lenders are floundering, applications for FHA financing are up more than 20 percent from a year ago and with good reason: The old-time loan insurance program is increasingly seen as a safe-haven for borrowers who want to limit mortgage risk.

During the past few years, millions of people financed with so-called "nontraditional" loans -- mortgages with strange and exotic terms. In many cases, borrowers could get big loans with little or nothing down and low rates up-front.

The catch?

The very same loans often became far more expensive within two or three years -- so expensive that huge numbers of homeowners have been unable to keep up with their payments.

But with the FHA, a lot of the risk associated with the new loan formats is eliminated. For instance, there are no prepayment penalties with FHA financing. Adjustable-rate re-sets are limited to 2 percentage points, not the 5 or 6 percentage points found with most toxic mortgages. Perhaps most importantly, if your finances change, the FHA has a hugely-successful program to help prevent foreclosures.

In addition to its traditional mortgages, the FHA has just come out with a new loan designed specifically for troubled ARM borrowers who face foreclosure. Called "FHASecure," the new program is available even to homeowners who have missed six or more monthly payments.

While FHA loans can help a lot of borrowers, such mortgages are not for everyone.

For instance, the FHA won't insure a loan where borrower income and employment are not verified. The FHA wants appraisals for every property. Lastly, you need either 3 percent down or 3 percent equity to get an FHA mortgage, a requirement which Congress may lower.

FHA mortgages are widely available. While FHA loans are the same no matter which lender you choose, interest rates and costs vary so it pays to shop around. Also, if you're a borrower with a toxic mortgage it can pay to look at refinancing with an FHA loan now -- before monthly costs rise, payments are missed and credit is ruined.

Published: November 27, 2007

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