The essential role of FHA loans
|Year||FHA Purchase Loan Market Share (percent) - by Loan Count|
Over the past two decades, the share of FHA-insured loans as a percentage of all mortgages tells an interesting story about the U.S. housing market.
In the years leading up to the Great Recession, there was a steady decline in FHA loans. From 2001 to 2006, their percentages decreased from 14.3% to 4.5%.Footnote1 The impact of rising home prices discouraged some potential FHA applicants from looking for a home. Plus, the easy availability of money allowed many would-be FHA candidates to obtain conventional financing instead.
But with the onset of the Great Recession, FHA loans reversed course. In 2008, FHA loans surged to 24.1% of total purchase mortgages (excluding refinances). While the sheer number of FHA-insured loans grew from 317,181 in 2007 to 844,893, total loans precipitously dropped by more than 1.7 million.Footnote1
Over the next three years, as incredible as it seems today, FHA-backed loans increased to more than 30% of all mortgages!Footnote1 As a result, FHA loans had helped to keep the housing market afloat through the recession's darkest days.
Since then, the housing market slowly recovered. From 2012 through last year, total mortgages climbed from 2.8 to 5.0 million. The percentage of FHA loans remained above 20% for four of these years and has not dipped below 16% since.Footnote1
The basics of FHA-insured loans
FHA loans are designed for low- to moderate-income borrowers who may have difficulty obtaining loans directly from private lenders. Specifically, an FHA loan is a mortgage issued by an FHA-approved lender, such as Bank of America, that's insured by the Federal Housing Administration. The most significant benefits of an FHA-insured loan are a reduced down-payment requirement and the ability to purchase a home with a fair, or even poor, credit score.Footnote2
The property must be appraised by an FHA-approved appraiser and meet certain minimum standards. The buyer is also required to occupy the home as their principal residence.Footnote2 Additionally, the new homeowner has to pay two types of mortgage insurance premiums (MIPs), an upfront MIP and an annual MIP.Footnote3
More than 75% of FHA home loans go to first-time homebuyers.Footnote4 It should be noted, however, that in 2020, for instance, 57% of new homebuyers obtained a conventional mortgage, while only 29% opted for an FHA-insured loan.Footnote5
Recent FHA updates assist buyers and homeowners
In response to changes in home prices, FHA loan revisions go into effect at the start of each calendar year. For 2022, these rules raised the limits for single-family homes from $356,362Footnote6 to $420,680Footnote7 in most low-cost areas and from $822,375Footnote6 to $970,800Footnote7 in high-cost areas.
Earlier this year, two changes were made to FHA-insured loan criteria in response to the presidentially declared COVID-19 national emergency.
In an April 2022 letter to lenders, the Department of Housing and Urban Development (HUD) states that those homeowners with an FHA loan who were negatively affected financially during the national emergency, but who now were able to make modified monthly mortgage payments, are eligible for a new 40-year loan modification. The letter further stipulates that this is to reduce the borrower's principal and interest portion of their loan by a minimum of 25%.Footnote8
In July 2022, HUD announced "new flexibility for lenders when qualifying borrowers" who were compromised financially due to COVID-19 but now have stable incomes. HUD declared that borrowers should have continued opportunities to purchase homes using FHA-insured financing.Footnote9 As in the previous statement, the "FHA defines a COVID-19-related economic event as a temporary loss of employment, temporary reduction of income, or temporary reduction of hours worked" during the same national emergency.Footnote8
Currently, with higher mortgage rates slowing the unprecedented increases in home prices, the lopsided seller's market appears to be subsiding. In terms of FHA-insured loans, given that its loan limits continue to rise closer to the median price of housing, the program will remain an essential option, especially for moderate-income and first-time homebuyers.
1 FHA SINGLE FAMILY MARKET SHARE 2022 Q1, U.S. Department of Housing and Urban Development, 2022 Q1. Accessed August 2022.
2 Federal Housing Administration (FHA) Loan, Investopedia, Troy Segal, July 11, 2022. Accessed August 2022.
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, 2022. Accessed August 2022.
5 More First-time Buyers are Obtaining Conventional Instead of FHA Financing, National Association of REALTORS®, Scholastica (Gay) Cororaton, February 22, 2021, Accessed August 2022.
6 FHA Is Next to Raise 2021 Conforming Loan Limits, National Association of Realtors®, Realtor Magazine, December 3, 2020.
7 2022 FHA Limits, FHA.com, 2022. Accessed August 2022.
8 Update to the COVID-19 Recovery Loss Mitigation Options, Mortgagee Letter 2022-07, U.S. Department of Housing and Urban Development, April 18, 2022. Accessed August 2022.
9 FEDERAL HOUSING ADMINISTRATION EXPANDS MORTGAGE ELIGIBILITY FOR BORROWERS PREVIOUSLY AFFECTED BY COVID-19, HUD No. 22-129, HUD Public Affairs Press Release, July 7, 2022. Accessed August 2022.
MAP5008270 | 10/2022