FHA mortgages help 56% of all first-time buyers

by Peter G. Miller
November 24th, 2010

A new buyer and seller study from the National Association of Realtors shows that the housing market would virtually stop without the FHA loan program.

“With historically low mortgage rates,” says the National Association of Realtors, “almost all buyers (95 percent) chose fixed rate mortgages. There was very
little difference between first-time and repeat buyers in their choice of mortgage. FHA loans were the most common type of loan, with 43 percent of buyers choosing
this option, slightly above conventional loans. FHA loans were much more prevalent among first-time buyers compared with repeat buyers. More than half of first-time
buyers (56 percent) chose FHA loans, while a similar share of repeat buyers used conventional loans.”

FHA guidelines assure borrowers that they’re getting a decent loan without any hidden traps, trick, or prepayment penalties. The fact that so many first-time buyers are using such financing is enormously important because without that segment of the marketplace real estate activity would slow to a crawl.

NAR’s report says that 50 percent of all purchasers are now first-time buyers. The catch is that if you don’t have a robust market for entry-level purchasers then the rest of the market stalls.

Here’s why: If there are no first-time buyers than owners with existing properties cannot sell their homes. If they cannot sell their homes they cannot move, rent or buy up. The marketplace is dependent on first-time buyers to keep the system going, to prevent marketplace stagnation.

Battling Associations

Could the heavy use of FHA mortgages by first-time buyers be an example of the free market at work? Or is it the “danger” of over-utilization which so worries the Mortgage Bankers Association?

For their part, the nation’s real estate brokers do not seem especially troubled by the growth of the FHA program.

“The National Association of Realtors strongly supports FHA’s mortgage insurance programs,” said NAR President Ron Phipps. “FHA announced major changes earlier this year and took critical steps to strengthen and ensure its long-term financial soundness, and those efforts have paid off.”

“FHA’s audit reflected a change in home values and was not tied to excessive increases in defaults or unsound underwriting practices. In fact, the credit quality of FHA borrowers has increased significantly in the last several years; the average credit score for FHA customers has grown to 693, and less than 8 percent of the agency’s purchase borrowers this year had FICO scores below 620. The capital reserves are not FHA’s only reserve fund; FHA also has a cash reserve account separate from the capital reserve — and actual total reserves have grown to $33 billion.”

NAR, in fact, welcomes even more FHA loans:

“NAR is working closely with FHA to reassess and amend their lending policies so even more qualified home buyers can become home owners.”

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