Why do FHA loans have less foreclosures than other loans?

Long Beach CA said:
I though FHA loans are more risky.
 
Franklin Advantage:
There are several reasons that FHA (and VA) loans have lower default rates than conventional loans.

1.) FHA and VA loans have always required the borrower(s) to fully document their income. Fannie Mae, Freddie Mac Alt A, and Sub Prime loans have accepted alternate and no income verification loans.

This policy has lead to a disproportionate ratio of self-employed and commissioned borrowers with Fannie Mae, Freddie Mac and other home financing vehicles. When the economy slows down (or stops dead in its tracks), the self-employed and commission borrowers see greater volatility in their income.
 
2.) FHA and VA loans (VA loans have an even lower default rate even though VA loans require no down-payment) are assumable. This allows borrowers who are in trouble to find a buyer for their home with little costs. FHA loans do require the new buyer to qualify for the loan but their flexible underwriting guidelines do not make this difficult.

3.) FHA and VA variable rate loans are more conservative.   
   a.   FHA and VA variable rate loans have never offered deferred interest like Alt A and Sub Prime loans.   
   b.   FHA and VA variable rate loans have an annual interest rate adjustment cap of 1% where Fannie and Freddie have a 2% cap.    
   c.   FHA and VA hybrid loans (loans that are fixed for the initial 3, 5, or 7 years then become variable rate loans) have a 1% adjustment cap after the initial fixed period where Fannie and Freddie had 5% caps and Alt A and Sub Prime loans had caps as high as 7%.

4.) FHA and VA loan limits were lower than Fannie Mae and Freddie Mac. The lower loan limits made FHA and VA loans less desirable during the height of the housing bubble.

There are several additional reasons but the 1st and 4th reasons offered above are probably the main reasons for FHA and VA's current health.

http://www.f-advantage.com/fha.php
http://www.f-advantage.com/va.php