In recent testimony before Congress, Federal Reserve Chairwoman Janet Yellen confirmed what many potential homebuyers have known for years. "It has now become the case that any borrower without a pretty pristine credit rating finds it awfully hard to get a mortgage," she said. In a recent article in the National Mortgage News, there was discussion about FHA fees making it harder for first time homebuyers. FHA's fees are making more first time homebuyers wait as they feel they are being priced out of the market. At the same time, FHA wants lenders to make more loans for those with lower credit scores.
As recently as 2010, monthly premiums for an FHA-insured mortgage totaled 0.55% of the loan amount. Today, it's 1.35%, a 145% increase that translates into an additional $120 on a monthly mortgage payment for a $180,000 loan. The up-front fee that borrowers pay to the FHA has also risen dramatically, from 1% of the loan amount to 1.75%. Those fees have made it harder for some potential homebuyers to purchase. FHA has said they do not plan to lower those fees anytime soon.
First-time home purchases are now at historic lows. They have accounted for only 28% of existing home sales year-to-date, according to the National Association of Realtors. That’s 6 percentage points below the five-year average and well below the long-term benchmark of 40%.
There are many things that have contributed to the drop in first time homebuyers, some as simple as the economy. The last few years have been very hard on the 25-35 year old age group. That group is normally one of the age groups that make up the first time homebuyers, but many of them have large student loan debt. That debt is also making it harder for them to buy homes. Student loan debt has to be used in qualifying for a mortgage even if the payment is deferred – except with FHA loans as long as you can show it is deferred for at least 12 months after closing.
Many potential buyers are trying to save more money for their down payment and then use conventional financing, others are waiting to buy. Some are using FHA financing as they do not want to wait and feel now is the best time to buy.
FHA is still a great way to finance a new home, as I told clients recently, do not be afraid of using FHA financing, it's a 30 yr fixed rate loan, minimum down payment and allows you to buy at great interest rates!