Popularity of government-insured home loans soars

07.10.09
By Lewis Green

These days, Americans who are shopping for a mortgage are held to higher standards than in the recent past - in a tightened credit environment, banks are requiring better credit scores and asking for larger down payments.

But families who cannot meet these strict criteria have another option available to them: government-insured home loans.

New figures from the Mortgage Bankers Association reveal that the proportion of these types of mortgage applications - which include Federal Housing Administration and Veterans Administration home loans - rose to 35.9 percent in June.

This is the highest level of government-insured home loans that has been seen since November 1990, the MBA said. Among purchase applications, the share of these mortgages was 38.6 percent.

Orawin Velz, association vice president of economic forecasting at the MBA, said that homebuyers who are concerned about meeting credit score and down payment requirements are looking to government-backed mortgages as a viable alternative.

"A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans," he said.

"In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance," Velz added.

According to the most recent figures from the Federal Reserve, approximately half of banks tightened their lending standards last month, making it more difficult for the average U.S. household to secure a home loan.

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Banks are seeking higher credit scores for home loans.