Jack Lamey and his wife, Donna DiBlase, are happily settled in a townhouse they bought last September in Huntington Beach with a down payment and closing costs totaling $7,500. And they’re thankful it’s a three-bedroom place, because they’re expecting their first child.

Cathy Fields had more than the $8,000 she needed to buy a condo in Culver City last March, but she used the extra cash to make improvements and even invested some of it.

Mark Smith recently sold a Huntington Beach townhouse he bought last year with $5,000 cash and made a $30,000 profit. Dianne McKinnon had an almost identical experience when she sold a Garden Grove townhouse she bought two years ago with less than $7,000.

These are more than just Southern California real estate success stories. They’re examples of home buyers with limited resources who used Federal Housing Administration (FHA) loans to buy property with 5% down.


Most FHA mortgages are 30-year, fixed-rate loans that carry the same interest rates as conventional loans and can be used to buy new or existing homes. They are insured by the FHA program and funded by the same institutions that offer conventional loans. But some people think that because the program is connected to the U.S. Department of Housing and Urban Development (HUD) that FHA loans are available only for low-income families.

Here in California, where even many in the middle class can’t manage to save enough for the down payment for a conventional loan that requires 10% or 20% down, FHA financing may allow home shoppers, especially those seeking a townhome or condo in a lower-price area, a way to break into the market.

Because the FHA limit for a 5% down payment loan is $101,250 in California, FHA loans are mainly used for the purchase of condos and townhouses and some single-family homes in such regions as the Riverside-San Bernardino area, according to the California Assn. of Realtors.

In that area, CAR says the median price of a single-family home is $124,000, compared to the Los Angeles median of $224,000.


Bob De Monte, regional administrator for the FHA, acknowledges that the FHA’s Santa Ana office, which handles the San Bernardino-Riverside business, “continues to be the most productive” in the state. Last year, the Santa Ana office handled 28,804 FHA loans for single-family homes, while the Los Angeles office processed only 18,324.

A total of 86,569 FHA single-family home loans were issued in California last year, but that represents only 9.3% of all single-family home loans issued in the state last year--half the national average.

“The maximum benefit with the FHA loans is found on homes that are priced well below the median price in California and are very much atypical homes,” says Joel Singer, chief economist for CAR.

But with condos and townhouses, which sell for an average of $138,000 in California, the financing device is more useful.

Even home shoppers in the pricey areas of Orange County and Los Angeles’ Westside make FHA loans work, and some use FHA loans not as a last-ditch effort, but an investment device.

Take Cathy Fields, 34, for example. She went FHA to buy a two-bedroom, one-bath condo in Culver City and had extra cash besides the $8,000 for the down payment and closing costs.

“Even though I could have gone conventional (ith 10% down), I wanted to take the extra money and invest it in something else and for improvements,” said Fields, a student counselor, who is single. “I did not want to put all of my accessible cash into one property.”

Last March, she paid $105,500 for the unit, and comparable ones are now selling for $130,000. “I think it was a pretty good investment,” she said.


Mark Smith, who is also single, recently sold his first property, which he bought last year. The 26-year-old physician’s consultant used $5,000 in cash and an FHA loan to buy a two-bedroom, one-bath Huntington Beach townhome for $94,500, and he made nearly a $30,000 profit when he sold it a year later for $128,750.

“I was getting crushed in taxes and had to do something,” he explains his determination to find a way to buy his first property, even though he had a limited amount of cash available.

Wayne Burrows, a 27-year-old buyer for a food service distributor, and Stewart Hoke, a 39-year-old supervisor for the city of Culver City, teamed up to buy a two-bedroom, two-bath condo in Culver City last October for $104,000 with just $6,000 cash.

Now, they’ve found a house they like and are selling the condo, which is in escrow for $139,950.

They recall that they were ready to abandon trying to buy the condo because they didn’t have 10% for a down payment for a conventional loan, but then their agent encouraged them to go FHA. They cut it close, but they got a start in the market.

Dianne McKinnon, a 37-year-old letter carrier, also went in with a friend to use an FHA loan to buy a two-bedroom, 1 3/4-bath townhome in Garden Grove two years ago for $93,000.

“It was the only way we could have gone,” she explained. “We had only about $7,000 to play with and we used it all.” They sold the property in June for $125,550.

Lamey, a 27-year-old marketing research consultant, and his wife, Donna, a 27-year-old journalist, purchased a three-bedroom, 1 1/2-bath townhouse in Huntington Beach for $103,000 last September. Since they’re expecting their first child in the fall, they’re in no hurry to sell, but similar townhouses in their complex are now selling for $130,000.


“There’s no reason that a first-time buyer who qualifies for an FHA loan shouldn’t use one,” said Lamey, who notes that one advantage of getting in with just 5% down can be winding up with extra cash that will come in handy once you move in.

“You’ve got to put some furniture in a house when you buy it,” he said.

While these are success stories of people who have bought with FHA loans, agents and officials of real estate groups say that rising prices are hampering the usefulness of the FHA program in California because of the $101,250 limit.

“We don’t see very much property at that price anymore,” says Sieglinde Summer, a broker for Star Real Estate in Fountain Valley who has worked in real estate in Southern California for 17 years. “Last year, you could still find property at that price.”

U.S. Sen. Alan Cranston (D-Calif.), chairman of the Senate Banking Committee, is one of the backers of the proposed National Affordable Housing Act (NAHA). Based on a bill he introduced last March along with Sen. Alfonse D’Amato (R-N.Y.), it includes provisions that could make the FHA program more useful to Southern Californians.

Increase Limit on Loans

The legislation would increase the limit on the FHA loans from $101,250 to 95% of the median home price in the market, which would bring it to nearly $200,000 in Los Angeles. The bill would also decrease the amount of the down payment from 5% to 3%.

A bill introduced in the House of Representatives last February by Rep. David Price (D-N.C.), the Home Ownership Act of 1989, includes the same provisions. But it would also permit the FHA to insure adjustable-rate mortgages with interest rates that could be adjusted by 2% a year, up from the 1% that’s allowed now for FHA adjustables, which are not widely used.

That legislation does not have as much momentum as the NAHA.

“The Cranston bill, should it pass, would have a dramatic effect on the availability of FHA loans in Southern California,” says CAR’s Singer. The economist estimates that fewer than 10% of the homes sold in the Greater Los Angeles area qualify for FHA loans, but that figure would jump to 45% with the legislation in place.

Cranston explained his interest in the bill:

“I was aware of the obvious problems in California where ceilings were so low that FHA didn’t apply in many places. Then I was made well aware that new families with pretty good incomes couldn’t get enough money for the down payment, so they were knocked out. So on that front, we came up with what’s in the bill to help.”

Senator Was a Home Builder

Cranston was a home builder before he first ran for the Senate in 1968. He was president of Homes for a Better America, a Los Angeles home-building company, for a year before he ran, and in the late 1940s and early 1950s, he served as president of The Cranston Co., a Palo Alto construction firm founded by his father.

“I have a background in the private enterprise side of the table and know what it’s like to deal with the people on the other side of the table, the FHA and so forth,” Cranston said.

The senator said he thinks the Senate bill could be passed early next year. “We could conceivably do it this fall, although I don’t think that’s very likely,” he said.

Housing experts say the FHA elements of the two housing bills are getting strong support because they would not require any additional government funding. The two pieces of legislation will likely be combined as a compromise bill at some point to strengthen the chances for passage.

FHA’s De Monte acknowledges the apparent momentum of FHA reform bills, but says he’s a little skeptical that the provision to raise the FHA loan funding limit will be approved as drafted.

“I don’t know that it will go to 95%" of the median, De Monte said. “I think there is more of a chance that it will go to the 80% to 85% range.”

But even if the FHA limit is only raised to 80%, that could open the doors for many Los Angeles home shoppers by enabling them to purchase a house with a price of $176,000 with just a 3% down payment of $5,280 and closing costs.

HOW TO TELL IF YOU QUALIFY FOR FHA The FHA uses two formulas to determine whether a loan candidate has the necessary financial qualifications.

One specifies that the total monthly mortgage payment plus the estimated monthly maintenance, repair and utilities costs should not exceed 38% of the applicant’s monthly income after federal taxes are deducted.

The other states that the total housing expense as calculated above, plus liabilities that extend beyond a 10-month period and state tax and social security deductions, should not add up to more than 53% of the applicant’s income after federal taxes.