The intent of this article is to quantify the features of the FHA loan, both good and bad, and discuss the circumstances under which it’s a beneficial program to the homebuyer (either first, second, or third time homebuyer).

First, FHA stands for Federal Housing Authority, and though the phrase “FHA loan” implies otherwise, the FHA does not lend money. Rather, the FHA insures the loan. The money still comes from the lender selected by the borrower, but the FHA now provides an insurance policy to protect the lender in the event of borrower default. With this insurance, the lender has less risk, and so guidelines are less restrictive than with conventional financing.

The reader should be aware that FHA is completely different from Fannie Mae and Freddie Mac (otherwise known as GSEs, or “Government Sponsored Entities”). There has been a lot of buzz recently about Fannie and Freddie, but these entities, and the associated loans, are completely different than the FHA.

Recent events in the credit markets have made the FHA loan a true affordability solution for buyers. In fact, it is this author’s opinion that without the availability of the FHA loan, there would be very few people buying houses these days.

In mid-December of last year, a report began circulating amongst all the direct lenders citing “counties of declining market value” throughout the country. This report placed counties in one of 3 categories: 1) par (little or no depreciation in home values), 2) soft (significant depreciation), or 3) distressed (extreme depreciation). Since that time, the report, and the consequence to lending guidelines, has been revised and updated.

Where things currently stand is that lenders mandate a 5% LTV reduction for soft market, and a 10% LTV reduction for distressed markets. LTV stands for “loan-to-value”, and refers to the maximum amount of financing (as a ratio to the sales price) the lender will allow. So, for example, if a loan program in a “par” market allowed 90% financing, that same loan program in a distressed market would only allow 80% financing.

Since most counties in major metropolitan areas are on this list, hefty down payment requirements are placed on borrowers purchasing homes in these areas. On average, this means 10% down payment requirements in par markets, 15% down payment requirements in soft markets, and 20% down payment requirements in distressed markets.

But this is where FHA loans provide a saving grace. FHA loans are not subject to this “LTV reduction”. Rather, it is only the non-government loan programs (ie Fannie Mae and Freddie Mac) subject to this constraint. Further, FHA loans allow up to 97.75% LTV (so 2.25% down payment). On a $450,000 home in a soft market, this means the borrower only has to put down $10,125 instead of $67,500 on a non-government loan.

The other major benefit of the FHA program is the reduced credit requirements. Whereas non-government loans require credit scores of 700+, the FHA loan accepts credit scores as low as 640.

Is there a catch to all this? Somewhat. The FHA loan carries a mandatory Mortgage Insurance Premium of 1.5% of the loan amount that must be paid at settlement; on a $400,000 loan, 1.5% would be $6,000. This will change to 1.25-2.25%, depending on the borrower’s financial strength, when the new FHA guidelines are released July 14, 2008.

However, even with the 1.5% Mortgage Insurance Premium, the total “down payment” required from the buyer (2.25% + 1.5%= 3.75%) is less than with a non-government program (10% in a best case scenario). True, the additional 1.5% fee is not going towards equity, like a down payment, but the total out-pocket expense is still less.

Another “catch” to the FHA loan is that, assuming the borrower does the 97.75% financing (or at least anything above 78%), the borrower will have to pay Monthly Mortgage Insurance (MMI). MMI is similar to PMI (Private Mortgage Insurance on non-government loans). However, the MMI payment of 0.50% of the loan amount is slightly less than a PMI payment would be for the same loan amount.

But is MMI or PMI really a bad thing? Before January 2007 it was, since it was not tax deductible. But as of January 1, 2007, following the “Tax Relief and Health Care Act of 2006” which President Bush signed into law, mortgage insurance premiums are now tax deductible. Before this time, buyers wanting financing in excess of 80% got a second mortgage to avoid MMI or PMI (and 2^nd mortgages, when used for a purchase, are tax deductible). But with the new tax law, the mortgage insurance premium carries the same tax benefit as a second mortgage. Thus MMI can be thought of as a “second mortgage”.

And lastly, another “catch” to the FHA loans is they do take slightly longer to process. The reason is that there is more paperwork, steps, and procedures for the lender to go through then with non-government programs. In total, this means about 10 extra calendar days to the process, so 35-40 days instead of the usual 25-30. What I tell homebuyers making an offer on a home and planning to use FHA financing is to simply request a 40-45 day escrow instead of the usual 30. In this market, with sellers eager to sell, this is never a problem.

And those are the “catches” to the FHA loan, but minor if not insignificant in this author’s opinion. Truly, the only real thorn in the “FHA rose” is the 1.5% Mortgage Insurance Premium. And for borrowers that have the assets to afford a 15%+ down payment, I tell them to use conventional financing, so they can avoid this Mortgage Insurance Premium (and also qualify for a better rate with the larger down payment).

Speaking of rate, the reader may be envisioning a monster rate for the FHA loan. But the rates are in fact quite modest. As of mid-may, wholesale rates on an FHA loan with 97.75% financing (2.25% down) were about 6.00%, compared with 5.625% on a conventional loan with 80% financing.

Thus, with the 15-20% down payment requirements of conventional loans for houses in “areas of declining market value”, FHA loans are a great resource for home buyers unable to afford these large down payments. And since the FHA loan limit has been raised as high as $729,750 in some areas, the applicability is even broader. Yes, there are a few “catches” to the FHA loan, but overall the pros outweigh the cons for the borrower with limited assets.

In some states, attorneys draft purchase offers. In other states, like California, most residential purchase offers are filled out by real estate agents using pre-printed contracts that were drafted by attorneys. In either case, make sure to read the offer and understand it before it's presented to the sellers.

HOUSE HUNTING TIP: A surprising number of buyers don't read the fine print. Instead, they rely on their attorney or real estate agent to make sure the offer reflects their wishes. Don't make this mistake. If possible, ask to see a draft of the offer beforehand so that you have sufficient time to read and digest it.

The purchase offer typically includes contingencies to protect buyers. Common contingencies are for financing, appraisal, inspections and the sale of another property. Contingencies are conditions that must be satisfied for the transaction to move forward.

Contingencies can be written in various ways. For example, an inspection contingency might give the buyer the unilateral right to withdraw from the contract without penalty. Or, it could specify that the buyers give the sellers the opportunity to remedy defects. In the latter case, the buyers' deposit could be at risk if they backed out of the contract without giving the sellers the chance to make repairs.

During the fast-paced seller's market of a few years ago, buyers often made offers without contingencies in order to be competitive. In some cases, lawsuits developed after closing when the buyers discovered defects they were previously unaware of.

While it's preferable to include contingencies, there are times when it may be reasonable to waive a contingency as long as you are aware of the consequences before doing so. For example, recently buyers made an offer in competition on a desirable house in the Oakland Hills of Northern California. They did not include a contingency for the house to appraise for the purchase price.

The appraiser was unable to appraise the house for the agreed-upon price because of a lack of sales in the neighborhood in recent months. Without an appraisal contingency, the buyers could have lost their deposit to the sellers if they backed out because the house appraised a little low.

However, the buyers were aware of the fact that the house might not appraise for the price they agreed to pay. They were willing to increase their down payment to make up the difference. And, the sale went through.

In addition to the price and contingencies, the purchase offer should include such specifics as the deposit amount, the closing date, the date the sellers will deliver possession, any personal property such as a washer or dryer that is included, and any real property such as a light fixture that is excluded from the sale. It is best to be as specific as possible.

The time to tie up any loose ends is before the final contract is signed. Leaving issues to be worked out later can work to your disadvantage. You could find that a previously congenial seller turns cranky if he's asked to pay for defects discovered during your inspections.

For example, let's say that you want to close the transaction and receive possession of your new home on a Friday so that you can move in over the weekend. You are better off specifying a date for closing than you are indicating a closing of a certain number of days from acceptance. If the negotiations take several days, your 30-day closing date could end up falling on a Monday.

THE CLOSING: An uncooperative seller might hold you to this.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

A: Staining a deck offers lots of advantages, and I recommend doing a new deck as soon as the wood has dried and settled in. Yours could be done at any time the weather conditions are appropriate, and should be repeated every couple of years, depending on weather conditions.

A good deck stain will penetrate into the wood, where it offers moisture protection by helping the wood to shed water. This prolongs the life of the wood, and helps prevent splintering and loosening around fasteners. The stain also provides protection from the sun's ultraviolet rays, which also helps prevent drying and fading of the wood. Finally, the stain helps you preserve the original color of the deck, or lets you change, enhance or restore color as desired.

Deck stains are different from the type of wood stain you would use to stain a woodworking project. Look for a name-brand product specifically formulated for exterior deck use. It should have UV protection, water resistance and mildew resistance. You can select from a transparent stain, which is either natural or has relatively subtle wood-tone pigments to enhance the natural look of the wood, or semi-transparent stains that have more pigment.

If you like the look of the wood as is, choose a natural color. If you want to enhance the color a little or if it's started to fade at all, your best bet is to choose a color that matches the type of wood on the deck -- for example, redwood or cedar. Left untreated, most non-pressure-treated woods will fade to a shade of gray, and if you like that color there are deck stains that will emulate that as well.

Before applying the stain, make sure the deck is as clean and dust-free as possible. Do not apply when the wood is too hot to touch comfortably, or if it has rained recently and the deck is still damp. Mix the stain thoroughly in the can, and if you are using more than one can, be sure and intermix the cans to ensure a consistent color.

The stain can be applied with a brush or a roller for the large flat surfaces. For posts and railings, you can use a pump-up garden sprayer (make sure it's a sprayer that will be dedicated to the purpose, so that the stain is never intermingled with pesticides, herbicides, or anything else you might use the sprayer for). The sprayer simplifies the application and you shouldn't have too much overspray, although you do want to be sure and cover landscaping and anything else you don't want the stain to get on. For really large decks, you might consider renting an airless paint sprayer for the entire project.

Complete mixing, application and safety instructions will be on the can, and they can vary between manufacturers so be sure and read them over carefully.

Q: About six years ago, I had my house painted with Valspar paint. Shortly thereafter, I had a humidifier added to my furnace and have kept it at about 40 percent. I noticed yellowish-brown marks running down my walls, especially in the bathrooms and across from air ducts. I called Valspar and was told that some pigments in paint will cause this. Now I want to have my house re-painted and I was wondering if you have heard of this problem. I know the walls will have to be washed first but wonder if a primer should be used. --Pat J.

A: I have not heard of this specific problem, but if Valspar says it could be a problem with the pigment in the paint, I would suggest contacting them again (or contacting the paint store where you purchased the paint) and asking for a product representative to come out to your home and analyze the situation. This is a free service, and should be very helpful in determining the exact cause of the problem.

I would definitely agree that the walls need to be washed first, and a stain-blocking primer will be helpful in covering the streaks prior to repainting, and will also help the finish coat adhere better. However, if there is an underlying problem that is preventing the first coat of paint from adhering to the walls, then primer won't help. You need to get to the root of the problem first, and that's where the product rep will definitely help.

Remodeling and repair questions? E-mail Paul at paul2887@ykwc.net.