March 2021

Changes drive new demand for FHA loans

QuarterConventionalFHAVA GuaranteedCash

In the second quarter of 2018, FHA-guaranteed loan use for new construction home purchases fell to a recent low of 10.7%. Since then, there has been a steep rise in their usage. In just two years, FHA demand nearly doubled to 20.5% of all new home sales!Footnote1 In spite of the ongoing housing shortage and the recent economic slowdown, homebuyers are taking advantage of all available resources.

A refresher on FHA-insured loans

Designed for low- to moderate-income borrowers, an FHA loan is a mortgage issued by an FHA-approved lender, such as Bank of America®, and insured by the Federal Housing Administration (FHA).Footnote2 Footnote3 The most significant benefits of an FHA loan are a reduced down-payment requirement, as low as 3.5%, and the ability to purchase a home with a moderate credit score, starting at 500.Footnote2

More than 75% of FHA home loans go to first-time homebuyers.Footnote4 In the third-quarter of 2020, the median price of an FHA loan on new construction was $252,900, which was substantially lower than the $324,900 median price on all new home sales.Footnote1

Revised guidelines create opportunities for your clients

Each year, in response to changes in home prices, national FHA loan limit revisions go into effect.Footnote5 For 2021, these rules raised the FHA ceiling on loans for single-family homes from $331,760 to $356,362 and, in high-cost areas, from $765,600 to $822,375.Footnote6

Another important recent change to the FHA rules is the loosened restrictions on purchasing condominiums.Footnote7 The revisions allow FHA financing for individual units within condo complexes.Footnote8 According to John Smaby, president of the National Association of Realtors, “It goes without saying that condominiums are often the most affordable option for first-time homebuyers…This ruling…will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people.”Footnote7

The expectation is that developers will capitalize on these FHA updates by directing more resources toward building condominiums and reasonably priced single-family homes. If this happens, it would be a win-win for builders and homebuyers, and could help ease the housing shortage over time.

1 New Residential Sales: Historical Data, United States Census Bureau, October 26, 2020.

2 Federal Housing Administration (FHA) Loan, Investopedia, Troy Segal, September 24, 2019.

3 FHA mortgage insurance protects the lender (not the borrower) if a borrower defaults on the FHA loan. Each FHA borrower pays a Mortgage Insurance Premium. The premiums are collected and used by the FHA to reimburse the lender (not the borrower) should the borrower default and the lender must foreclose upon the loan/sustain a loss. This insurance enables a lender to provide loan options and benefits often not available through conventional financing.

Monthly Mortgage Insurance Premiums (MIP) and Upfront Mortgage Insurance Premiums (UFMIP) apply. Maximum loan amounts vary by county.

4 "Why First-Time Home Buyers Use the FHA Loan Program," FHA Handbook, Brandon Cornett, 2020.

5 "FHA loan limits to increase in most of U.S. in 2019," HousingWire (HW Media, LLC), Kelsey Ramirez, December 14, 2018.

6 "FHA Is Next to Raise 2021 Conforming Loan Limits," National Association of Realtors®, Realtor Magazine, December 3, 2020.

7 "FHA to make financing easier for condo owners," HousingWire (HW Media, LLC), Jessica Guerin, August 14, 2019.

8 "FHA to allow ‘spot approvals’ — a practice it banned almost 10 years ago," The Mortgage Reports, Peter Miller, September 3, 2019.

MAP3439797 | 02/2021

More from this month's issue