FHA loans decline in popularity
August 13th, 2013
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Government-insured FHA mortgage loans have been in existence since the 1930s as a way to help low and moderate-income borrowers afford a home. FHA guidelines have always allowed lower down payments and looser credit qualifications than conventional financing; but during the freewheeling time before the housing bubble burst in 2003-2007, conventional loans were just as easy to obtain and many had zero-down-payment options so FHA loans were less popular. After the housing crisis, borrowers turned to FHA loans for low-down-payment financing. At their peak in 2009, FHA 203b loans were 32.6 percent of all new mortgage loans. In 2012, FHA loans dropped back to just 14.6 percent of all new home loans.
Since 2009, FHA loan guidelines have changed. Mortgage insurance premiums are now required for a minimum of 11 years on all FHA loans and for the life of the loan on all FHA loans with a down payment of less than 5 percent. The mortgage premiums have gone up to 1.75 percent for up-front mortgage insurance and 1.35 percent in annual mortgage insurance, which means buyers of a $200,000 home are required to pay an extra $3,500 in initial loan costs which can be wrapped into the loan balance. In addition, FHA borrowers must pay $225 per month for their mortgage insurance.
FHA approved lenders have raised their credit standards along with conventional lenders. The average credit score for an approved FHA loan, according to the FHA, was 695 during the second quarter of 2013.
FHA loan advantages
In spite of higher credit standards and higher mortgage insurance costs, many consumers still opt for an FHA loan. FHA loans are appealing for several reasons:
- Higher loan limits. Conventional loans are limited to $417,000 or to $625,500 in markets with higher housing costs; but in those high-cost markets, FHA loan limits go up to $729,750.
- Lower interest rates. FHA interest rates are typically slightly lower than conventional loan rates. For example, during the week ending July 19, 2013, conventional 30-year fixed-rate mortgage rates averaged 4.60 percent, while 30-year fixed-rate FHA loan interest rates averaged 4.22 percent.
- Looser credit standards. Even though FHA lenders have tightened their standards, these loans are still a little easier to qualify for than a conventional loan. In addition, FHA interest rates are the same regardless of the borrowers’ credit scores, while conventional loans have higher rates for borrowers with lower credit scores.
- Lower down-payment requirements. Few conventional loans are available with a down payment of less than 5 percent and many lenders require a higher down payment, particularly for borrowers with credit issues. FHA loans require only 3.5 percent as a down payment.
Consult a lender to compare both conventional and FHA loan options before choosing a mortgage.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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