FHA loans soar in Sacramento area

The number of government-backed FHA loans jumped sharply last year, propping up a local real estate market otherwise saturated by loan denials.

During 2008, lenders issued 8,998 FHA loans in the Sacramento region, up from 649 during 2007, according to statistics released this week by the Federal Financial Institutions Examination Council.

"There’s been such a shift in available financing as the market bottoms out," said Larry Bush, a regional spokesman for the U.S. Department of Housing and Urban Development.

FHA loans are primarily used by people who can’t afford a big down payment, or who otherwise aren’t able to obtain mortgage insurance. FHA buyers need put down only about 3 percent. With the credit market shot, most conventional loans require at least 10 percent down.

Other than FHA loans, there are "very few lenders out there that will even toy with 95 percent financing," said John Arvanitis, owner of Sunrise Vista Mortgage, a Citrus Heights-based company that specializes in FHA loans.

FHA loans fell out of favor during the housing boom, experts said, because it didn’t matter much whether borrowers had enough for a substantial down payment. Banks were giving zero down, "no proof" mortgages left and right.

Also during the boom, FHA mortgages were capped locally around $360,000, which didn’t buy much back then. Now, prices have plunged, and the cap has been raised to $580,000, covering the vast majority of the local market.

"Even during the subprime era, I was trying to get people to go with FHA loans," Arvanitis said, adding that it was a tougher sell back then.

FHA insures loans; it doesn’t make them. Like any insurer, the government tries to be careful before it acts.

There’s a pretty long list of standards that a home must meet before an FHA loan will be administered, said Scott Burton, who specializes in FHA homes and runs Burton & Co. Real Estate Appraisals, a local outfit.

For instance, homes often don’t pass muster because of lead-based paint, or roof or termite damage, Burton said.

The number of FHA loans issued locally would be even higher if the banks that owned foreclosed properties were willing to fix them up to FHA standards. Instead, "they want to sell them as is," said Burton, adding that banks are slowly coming around.

The 8,998 loans for 2008 also includes a small number of VA loans, which have slightly different terms.

The FHA loans are one of the few bright spots in the new federal report. It showed lenders denying about one-third of home loan applications in the Sacramento region during 2008, roughly double the percentage of denials in 2005 and similar to 2007, another bad year.

Mark Van Winkle and his family recently bought a home in Carmichael using an FHA loan. He’s been in the Sacramento area for decades and has owned a house before, but got into some financial trouble around the turn of the century, forcing him to rent.

"We had no choice but to go with an FHA loan because of financial reasons," said Van Winkle, who got his loan through Sunrise Vista.

Despite his hands being tied, "it went really smooth," Van Winkle added.