New FHA mortgages proposed to entice more

The federal government is proposing new, short-term mortgage products to entice more people to buy homes.

Mortgages insured by the Federal Housing Administration would offer fixed interest rates for between three and 10 years, and rates could rise afterward, the Department of Housing and Urban Development proposed last week.

FHA loans are backed by the government and allow homes to be bought by people who have blemished credit or not enough money for the minimum 5 percent down payment required by most private lenders. Under existing guidelines, the FHA can insure only fixed-rate or one-year adjustable loans, said Lemar Wooley, a HUD spokesman. The agency estimates that 40,000 families would take advantage of the new loans.

On loans with fixed interest rate periods of three or five years, the rate would not change by more than 1 percent per year afterward and no more than 5 percent for the life of the loan. For loans with fixed-rate periods of seven to 10 years, the interest rate afterward would not rise more than 2 percent annually, or 6 percent for the life of the loan.

The proposal will be published in the Federal Register and be open to public comment for 60 days.

Associated Press and Bloomberg News