It does seem as though the government is backing loans that won’t be repaid through the FHA. I’ve already seen some 2007/2008 FHA financed properties foreclosed. The government is encouraging speculation at this point. The tax credit combined with 3.5% down payment means effective zero down financing is being offered with tax payer backing.

I’m not sure what benefit the FHA really provides and understand it has been expanded greatly from its beginnings. I’m not a finance guy but I expect the added cost of FHA loans is not enough to cover eventual losses.

I guess if loan costs and losses would actually net out then criticism would be muted, provided the tax credit goes away and doesn’t come back. But the purpose of any government program of course is to reward one group of people at the expense of another. If covering losses with loan costs and fees was part of the calculation the government wouldn’t be involved.

I’m going conventional because I am trying to be conservative with how much I borrow and how much it will cost long term. But I am competing with the FHA crowd that doesn’t seem to comprehend that they are drastically overpaying BECAUSE of the tax credit and FHA financing terms. The zero to limited money down crowd is bidding up all available inventory for now.

I’m will be a first time homebuyer and I eagerly await the expiration of the tax credit so prices will go back down. Prices will go down more than 8k since that 8k has is leveraged at a 28:1 ratio with 3.5% down FHA loans.

It is no coincidence that the “sweet spot” for flipper pricing at the low end is $225k to $250k.