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When Nobody Else Will Lend, Where Do You Go? Taxpayers

October 18, 2009

Here’s a story from Clusterstock titled “20 Year Old Buys Home With $183,000 FHA Loan And Just 3.5% Down” which¬†provides a live example of why the housing market on the low end is going gangbusters.

Denise Tejada bought a house last month at the age of 20, thanks in large part to a loan guaranteed by the Federal Housing Authority.

Tejada’s loan is toxic–to her and to the taxpayers who are backing the loan. Her house cost $155,000. Tejada’s loan was apparently made on a micro-down payment of just 3.5%, the minimum down payment to qualify for an FHA loan. On top of this, however, she got an additional government backed loan to make improvements. Her total loans amount to $183,0000.

The monthly payments on her debt amount to $1328. Her income is $2470, leaving her with just $380 a week to live on. She’s paying 54% of her income to make the mortgage payments.

Enough said. This is the reality, 3.5% down payments with the FHA, and in California the loan amount can scale all the way up to $729,950. That is why you are seeing homes flying off the shelves. In fact, if you consider a $300K home with a 3.5% down payment, net of the $8,000 housing credit, the down payment is only $2,500, or less than 1%.

Think this problem is going away? Think again. The FHA is taking steps to clamp down on risk, with one example being the move to tighten rules on condos, but they are not nearly going far enough.

3.5% down alone is too low. 3.5% down requirement coupled with a $8,000 tax credit? Plain irresponsible. And remember, it’s all non-recourse in California given the fact that 99% of mortgage foreclosures are non-judicial.

[via Clusterstock]

Here’s the video ….


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