Many have been reporting that the age of the no-down-payment loan is dead.

It’s not.

A loan from the Federal Housing Administration (FHA) can get homebuyers 97% of the way there (the maximum FHA loan limit is 97% of the value of the home).  And a down payment assistance provider like AmeriDream can take him the rest of the way.

Here’s how it works:

Borrowing the first 97%

I was chatting with my lender partner, Matt Maret of Wells Fargo Home Mortgage, the other day and he gave me a little history lesson on the FHA.  The agency, he said, “was subprime before subprime was subprime.”

The FHA has always has been a catchall for people who had life happen to them.  Like the woman who got cancer and had to file for bankruptcy because of the $200,000 in medical bills.  Or the hard-working small business owner who fell on hard times.

But in the late 1990s, when banks started making subprime loans (to people with poor credit, for example), the FHA became less and less popular.  Why?  Simply put, loan officers made more money writing subprime loans than FHA loans.

But since the meltdown of the subprime sector of the mortgage market, the FHA has once again come back into favor.  Matt says that the FHA is a really good option for first-time homebuyers, people who have had credit challenges, and really anyone who has less than 10% to put down. 

“FHA loans are a really good option given what’s on the mortgage menu out there,” Matt said.  “It’s slim pickin’.”

Before President Bush signed the economic stimulus package that raised FHA loan limits, FHA loans weren’t relevant for most Valley homebuyers.  The previous limit was $262,200 in Maricopa County, and most homes in the Valley are priced above that.  Now that the limit is $346,250, many more homebuyers can take advantage of the FHA option.

With an FHA loan, the federal government doesn’t actually loan the money.  Instead, a lender – like Wells Fargo Home Mortgage, for example – loans the money, and the FHA guarantees it.  What that means is that if the borrower defaults, the government will pay the lender the amount of the loan.  It’s a way for the government to decrease (eliminate, really) the lender’s risk.

But while the FHA doesn’t require a stellar credit history, it does typically require a 31% housing debt-to-income ratio and a 41% total debt-to-income ratio.  Of course, FHA does make exceptions sometimes, for example, if a borrower’s debt-to-income ratio is a bit higher than 41% but his credit is really good and has a long, solid employment history.

Here’s how you calculate those ratios: if your monthly debt payments include $150 in credit card minimum payments, a $250 car payment, and $100 in school loans, and your mortgage payment is $1300, and your gross monthly income (before taxes) is $4500, then your housing debt-to-income ratio is $1300/4500, or 29%, and your total debt-to-income ratio is $1800/4500, or 40%.

All FHA loans are full-documentation loans; they don’t do any “funny business” as Matt put it, like stated income loans.  An FHA loan, Matt said, is a pretty cut-and-dry “what do you make, where do you bank” loan.

For borrowers who qualify for an FHA loan, if they have the 3% minimum required down payment, they’re set.  If they don’t, there’s a way that they can bridge the gap, make the down payment, and purchase the home.

Finding the last 3%

FHA rules say that the borrower’s down payment can’t be a gift from the seller of the home.  But it is okay if the money is a gift from somewhere else.  That’s where AmeriDream comes in.  The seller gives the money – which can go toward the buyer’s down payment and closing costs – to AmeriDream, which then passes it on to the buyer.

Intermediaries like AmeriDream are known as gift agencies or down payment assistance providers.  They charge a relatively small fee for their services – typically between $250 and $500.  They’re non-profit groups designed to facilitate homeownership for Americans who might not otherwise be able to buy their own homes.

The Department of Housing and Urban Development, which oversees the FHA, recently tried to shut down gift agencies like AmeriDream.  But a District Court judge ruled last week that HUD’s prohibition of seller-funded down payment assistance programs like AmeriDream was in violation of federal law.

In a statement, AmeriDream said that it’s campaign against HUD’s prohibition was supported by “members of Congress from both sides of the aisle, the Mortgage Bankers Association, the U.S. Conference of Mayors, the National Association of Counties, the National Association of Home Builders, the National Urban League, and over 14,000 individuals and families nationwide who sent comments into HUD, as well as others.”

So, to anyone who suggests that no-down-payment loans are dead: think again.  Hello, FHA and AmeriDream.