With lending criteria and mortgage-insurance premium rules tighter now for conventional loans, home buyers increasingly are turning to federally-backed mortgages, for which rules are less strict, lenders here say.

Meanwhile, declining property values have delivered a shock to some home owners who've sought to refinance their loans—and learned they would have to have a mortgage insurance on their new loan.

While loans insured by the Federal Housing Administration historically have been attractive to young and low-income buyers who often don't have as much money for a down payment as other borrowers, lenders say a growing percentage of all borrowers now are turning to FHA loans because they can't meet tightened restrictions on private mortgage insurance, which typically is required for loans for more than 80 percent of the value of the home.

"People are gravitating to FHA-insured loans," says Marcy Bennett, residential loan officer at the Spokane mortgage center for Walla Walla-based Banner Bank.

Adds Jackie Cardle, real estate lending manager for Spokane-based Global Credit Union, "We used to run 23 percent of our mortgages through FHA. Now we're doing 68 percent through FHA. You can't overlook government-backed products. We often don't wait to price conventional loans anymore" before approving an FHA loan.

Over the last 18 months, private mortgage-insurance providers have raised the minimum credit-score and down-payment requirements for home buyers, Bennett says. "They are no longer insuring zero-down or 3 percent-down loans," she says.

While the borrower pays the mortgage-insurance premium, such policies protect the lender from the potential costs of foreclosure if the borrower fails to make mortgage payments. When lenders require mortgage insurance, they usually package it with the mortgage, although the lender and insurer decide separately whether to approve the loan and whether to insure it.

Private mortgage-insurance premiums generally cost about 0.5 percent of the loan amount for the first year of the loan and often decline in price some after that. At that price, a monthly mortgage premium on a $150,000 loan would cost the borrower $62.50 a month.

In most cases, private mortgage insurance must be canceled by the lender when the borrower's equity in the home reaches 22 percent, although the borrower can request that the insurance be canceled when the equity reaches 20 percent.

That 20 percent equity threshold is what is tripping up some borrowers who look to refinance their loans, lenders say. Home owners who currently aren't paying a mortgage-insurance premium because their equity had been greater than 20 percent are finding when they apply to refinance that the soft housing market has left them with less equity than they thought, says Don Walker, president of Horizon Northwest Home Mortgage, of Spokane Valley. If their equity has fallen below 20 percent, they'll have to buymortgage insurance to obtain a new loan, Walker says.

"They would either have to be able to live by the new rules under a conventional loan or choose an FHA mortgage," he says, adding that some prospective borrowers have decided not to refinance at all because of mortgage-insurance costs.

"Even if they get a better loan rate, it might be offset by payments for insurance," Walker says. "If it makes sense, they might do it, because conventional mortgage insurance eventually is going to go away (for them), but they aren't happy about it."

Lenders haven't required borrowers to obtain mortgage insurance on existing mortgages to cover home-value decline, but mortgage insurers are tightening qualifications needed for new loans to reduce their risk of exposure later to declines in the value of the homes they insure, Bennett says.

Most mortgage-insurance providers now require borrowers to make a down payment of at least 10 percent of the purchase price of a home if they're applying for a conventional mortgage, she says.

Global Credit Union's Cardle says most young couples have been priced out of the conventional-mortgage market.

"Unless they have a credit score of 740 and above, they can't afford a conventional mortgage anymore," she says, adding that most prospective young home buyers don't have a score that high.

Cardle says the down payment for an FHA loan can be as low as 3.5 percent of the purchase price, and the FHA requires a minimum credit score of 620. "That's not unachievable," she says.

Mark Neumann, a vice president at Spokane Valley-based Horizon Credit Union, which owns Horizon Northwest Home Mortgage, says private mortgage insurers have grown decidedly more risk averse over the last 18 months.

"There's no question there's been a change in the private mortgage-insurance environment," Neumann says. "They're not doing high loan-to-value loans."

He says private mortgage insurers have responded aggressively to the increase in foreclosures nationwide by implementing tougher qualifications for borrowers, while the Obama administration has encouraged the FHA to continue to assist prospective home buyers.

Half of the home mortgages originated by Horizon in the last two years have been FHA loans, although in some recent months, about 70 percent of mortgages were FHA insured, Neumann says.

FHA's insurance program charges an up-front fee of up to 1.75 percent of the loan, although the fee can be financed over the life of the loan. In addition, it charges an ongoing premium of 0.5 percent to 0.55 percent of the principal loan amount annually. After a minimum of five years, the premium is canceled if the loan balance falls below 78 percent of the purchase price.

Cardle says virtually nobody is insuring mortgages for non-owner-occupied housing. "Investors who would be taking advantage of foreclosures have to put 20 percent down," she says.

FHA loans, because they are aimed at low- to moderate-income borrowers, are limited in the amount for which they can be written, Bennett says. In Spokane and Kootenai Counties, the total maximum FHA loan amount is $271,050.

The median price for homes sold in Spokane County was $175,000 in January, according to the Spokane Association of Realtors Multiple Listing Service.

Anyone wanting to borrow more than the amount allowed by FHA would have to obtain a conventional mortgage, or pay 20 percent down, she says.

FHA-backed loans don't need separate loan and insurance approval, Bennett says.

"We're permitted to underwrite mortgage insurance on behalf of the FHA," she says.