Reducing the number of FHA loans

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We’ve discussed soon-to-be implemented and proposed changes to FHA loans. While these changes haven’t been implemented/approved, a bigger question emerges… “why are all the changes needed?”

I alluded to the answer toward the end of one of my recent posts. The record number of foreclosures have almost tapped out the mortgage insurance fund for FHA loans. This fund is set aside to process and sell homes with FHA loans that go into foreclosure.

The other reason for the change is the number of FHA loans being closed each year. The government created FHA loans to assist potential homeowners with little credit history purchase a home. FHA loans were designed to be a niche loan program available in the market. Over the past few years more than half of new mortgages are FHA loans. Why did this occur?

Several years ago, I posted the question “is FHA the new subprime loan?” If you take the time to read that post, the statistics are eye opening. The number of FHA loans being approved have only climbed since my post in 2008. Regardless of whether or not you think FHA loans became the new subprime loan, consider this:

  • before subprime loans disappeared and the housing market crashed, FHA loans made up less than 10% of the new loans on the market. At that time there were no credit score requirements, alternate forms of credit were easy to use, the monthly mortgage insurance was less than half of what it is today, and down payment assistance programs were widely accepted.
  • today FHA loans look much different. Minimum credit scores have been introduced, and it is more difficult to use alternate forms of credit. Monthly mortgage insurance rates have more than doubled, and almost all of the down payment assistance programs are no longer acceptable gift sources to be used on FHA loans.

The government intended FHA loans to be a smaller part of the overall loan market. It has become the majority! The changes that have been implemented over the past few years, along with the proposed ones, are intended to keep FHA funded AND encourage buyers who don’t need an FHA to get a conventional mortgage.

Without considering the potential changes to FHA loans discussed last week, conventional loans are more attractive than FHA loans. While the minimum down payment is slightly larger (5% versus 3.5%), the mortgage insurance is noticeably less each month, there is no upfront mortgage insurance premium, and the credit score requirements are very similar to one another.

By making FHA loans more expensive on a monthly basis, the government hopes to turn FHA back into the niche market it was intended to be by steering buyers toward the use of conventional loans.

So… if you are sitting out there wanting to buy a home and need an FHA loan, from the trends over the past few years, FHA loans will only continue to be less attractive versus conventional loans. While rates are at historic lows and home values depressed, there isn’t a better time to buy a home. As we’ve discussed the last two weeks, FHA loans will only get more expensive month-to-month. If you are looking to buy a home in the state of Georgia, I can help get you started with the preapproval process!

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