It was the mortgage of last resort when home sales were booming. Buyers balked at the paperwork. Sellers hated the home-repair rules.
What a difference a housing bust makes.
"Now, it's almost automatic that it's FHA," said Keith L. Cross, a real estate agent with Century 21 Downtown in Baltimore.
Mortgages insured by the Federal Housing Administration are enjoying a tremendous resurgence as beleaguered lenders and private insurers make it harder to qualify for conventional loans.
Home buyers and refinancing owners nationwide took out nearly 530,000 FHA loans in the first half of the year, 160 percent more than in the corresponding months last year. In the Baltimore metro area, FHA loans skyrocketed from fewer than 2,500 to more than 9,300 - a nearly fourfold increase. Agency officials believe the recent federal takeover of mortgage financiers Fannie Mae and Freddie Mac will only add to its numbers.
Many of the new local FHA loans this year are refinancings. But even in this market, where home sales are falling precipitously, FHA mortgages for new purchases jumped 170 percent.
The low down payment is a key reason.
"You only have to put 3 percent down, so that left me with additional money," said FHA borrower Joanne Krstic, a software test engineer who put her leftover savings toward blinds, shutters and other items for the rowhouse she recently bought in Baltimore's Patterson Park neighborhood. "I thought I was going to have to put all the money I had on the down payment, and I believe with the conventional loan, I would have had to have done that."
Some FHA borrowers have managed to buy with nothing down by getting the required money from nonprofit groups that are, in turn, funded by home sellers. Come Oct. 1, though, the bar rises.
Under the housing rescue bill passed by Congress this summer, the minimum down payment for FHA loans will be 3.5 percent, and none of it can come from sellers. The goal is to avoid trouble down the road - FHA's parent, the U.S. Department of Housing and Urban Development, says the practice of seller-funded assistance contributes to foreclosures.
But the nonprofits - including Gaithersburg-based AmeriDream - are trying to overturn the assistance ban, arguing that it hurts lower-income buyers. Legislation is pending in Congress.
Real estate agents say they don't want to see seller-funded help go away, either.
"It's just going to further stymie the housing market," said Dominic Cantalupo, associate broker at Champion Realty in Pasadena. "There's so many folks ... getting pinched on every corner of their budget that they simply don't have the cash."
FHA mortgages are made by lenders, like any other loan, but are insured by the federal government. Conventional loans, by contrast, are backed by private mortgage insurers - at least when borrowers make down payments of less than 20 percent.
And private mortgage insurers have tightened their rules for "soft" or "declining" markets, a designation sometimes slapped on the Baltimore area. Want to buy a condo or townhouse here with a lender whose insurance comes from Mortgage Guaranty Insurance Corp.? Be prepared to put 10 percent down.
"Suddenly, we're a good option and perhaps the best option," said Meg Burns, FHA's director of single-family program development. She sees parallels to the early days of the agency, which was founded during the Depression to keep financing flowing to Americans after banks failed.
FHA, for years the loan for first-time buyers and people with imperfect credit, saw its share of the market dwindle during the housing boom. Borrowers flocked to higher-cost subprime loans with fewer upfront requirements - the mortgages that are causing so much trouble now - and sellers specified "no FHA."
Since then, the subprime industry has crumbled. Minimum credit scores for prime loans have risen. But there's no minimum score for FHA, which instead qualifies borrowers on factors such as financial history and whether they have enough income for the debt they want to take on.
Burns said FHA has also relaxed some of its rules so sellers don't have to repair minor problems, such as a ripped screen.
And temporarily higher loan limits that went into effect in March mean that borrowers in the Baltimore area, normally limited to $362,790, can obtain loans up to $560,000 through the end of the year.
Fewer than 10 percent of mortgage applications were for government-insured loans in July 2007, the Mortgage Bankers Association said. This July, it was nearly 30 percent.
Justin Hill, a loan officer with Prosperity Mortgage in Baltimore, can top that: With the rules for conventional loans "changing every day," he said, at least 80 percent of his business this year has been FHA.
First-timers aren't the only reason. The mortgage turmoil has brought new types of borrowers to FHA.
"We're seeing the consumers who are buying their second homes or third homes," Burns said.
The federal housing rescue bill that was passed this summer will increase the amount of down payment money FHA borrowers must have. Starting Oct. 1, the minimum will increase to 3.5 percent from 3 percent. Buyers will no longer be able to get some or all of their down payment from sellers, which includes nonprofit groups whose assistance to buyers is funded by sellers.
FHA also says it will raise its fees come Oct. 1. Most borrowers will pay upfront mortgage insurance premiums of 1.75 percent of their loan amount rather than 1.5 percent and annual premiums of 0.55 percent rather than 0.5 percent. For a $300,000 loan, that means $750 extra upfront and $150 more a year.