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During the 1980’s FHA loans made up almost 70% of loans made across the country. However during the last 20 years that number has dropped significantly as home prices appreciated faster than FHA loan limits. The 2008 government fiscal stimulus plan provided an increase in FHA loan limits from $417,000 to as much as $729,750 in certain areas with high home prices.

The FHA loan limit increase has caused a recent surge in FHA loan applications. The weekly report of mortgage activity prepared by the Mortgage Bankers Association (MBA) showed a 15% increase in FHA loan applications. FHA loans have many advantages that conventional loans do not.

FHA loans have lower interest rates than conventional loans. The interest rate on FHA loans is about 1% lower than regular loans. These loans are more attractive and have a lower rate because they can be resold to Fannie Mae or Freddie Mac, giving the implicit backing of the federal government. This lower rates will make homes much more affordable for borrowers, and offer an attractive solution to refinance out of an adjustable rate mortgage (ARM).

FHA loans also allow you to have much less equity than a conventional loan. Recently because of the credit crises and declining home values lenders have cut back on the percentage of the home value that they will lend on. A few years ago it was easy to find a loan with no down payment or only 5% down. Now many lenders require 20% or even 30% down payment. With an FHA loan it is possible to purchase a house with as little as 3% down. FHA loans also allow cash out with as low as 5% equity for some borrowers.

The low equity required in FHA has created a very attractive refinance option for many people in today’s declining home price market.