April 2020

Why more first-time homebuyers are choosing FHA loans

Quarter FHA VA Guaranteed Cash Conventional
2019-Q4 18.42% 5.92% 4.61% 71.05%
2019-Q3 15.48% 7.73% 7.14% 69.64%
2019-Q2 18.82% 8.06% 5.91% 67.20%
2019-Q1 17.24% 8.62% 5.17% 68.97%
2018-Q4 12.80% 6.40% 5.60% 75.20%
2018-Q3 13.79% 4.83% 6.90% 74.48%
2018-Q2 10.67% 6.74% 7.30% 75.28%
2018-Q1 11.90% 8.93% 5.36% 73.81%
2017-Q4 12.50% 8.33% 6.94% 72.22%
2017-Q3 14.79% 7.04% 4.93% 73.24%
2017-Q2 13.53% 8.82% 6.47% 71.18%
2017-Q1 14.10% 8.97% 4.49% 72.44%
2016-Q4 14.40% 8.80% 5.60% 71.20%
2016-Q3 13.79% 8.28% 4.83% 73.10%
2016-Q2 17.09% 9.49% 5.06% 68.35%
2016-Q1 17.16% 8.21% 5.22% 69.40%

From 2016 through the start of 2018, there was a slow decline in the use of FHA-guaranteed loans on new home sales, from 17.1% down to 11.9%. But more recently, between the second quarters of 2018 and 2019, data showed a steep rise in these new home loans, from 10.7% to 18.8%.Footnote1 Based on actual sales figures, that's an increase of 84%Footnote1 over this time period! What's going on here?

A primer on FHA-insured loans

Let's start with a short refresher on FHA loans. Designed for low- to moderate-income borrowers, an FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing AdministrationFootnote2 (FHA).Footnote3 The most conspicuous benefit of an FHA-insured loan is a reduced down payment requirement, as low as 3.5%. The majority of FHA loans go to first-time homebuyers, accounting for as much as 83% (excluding refinanced mortgages) in 2018.Footnote4

Revised FHA guidelines could benefit your clients

Corresponding to the recent rise in FHA-insured new home loans is the federal government's new FHA loan limits that went into effect on January 1, 2019.Footnote5 In response to increases in home prices, these rules raised the ceiling on loans that year for single-family homes from $294,515 to $314,827 for low-cost areas and from $679,650 to $726,525 for high-cost areas.Footnote5 In between these two cost areas, the limits are set at 115% of the median home price by county.Footnote5

Another important change to the FHA rules is the loosened restrictions on purchasing a condo. 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."Footnote6

An expectation is that developers will take advantage of the revised FHA guidelines by directing more resources toward building condominiums, and thus enable millennials and other first-time homebuyers to benefit from the new rules. If this happens, it would be a win-win situation — for builders and buyers — and could help ease the housing shortage at some point during the new decade.

1 U.S. Department of Housing and Urban Development, New Residential Construction

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 First-time homebuyers could snag lower costs for FHA loans under House-passed bill, CNBC, Sarah O'Brien, July 18, 2019

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

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

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