We’ve written in the past how policy changes at Freddie Mac and Fannie Mae have made conventional home loans more competitive with FHA loans, especially when it comes to down payments.
Loan origination data from the first quarter of 2018 suggest that conventional loans in Washington State are gaining even more ground over FHA. Here’s the latest on that front.
FHA Loan Share Decreased in 2018
According to the “Q1 2018 U.S. Residential Property Loan Origination Report” published by ATTOM Data Solutions earlier this year, FHA loans accounted for 10.9% of all residential mortgage loans generated during that quarter. That was a decrease from a year ago, when FHA share was at 13.3%.
Among other things, this suggests that more and more home buyers in Washington and elsewhere in the country are turning to conventional loans when buying a home. And that’s not surprising when you consider how the minimum down payment for conventional mortgages has dropped in recent years.
We’ll get back to the down payment trends in a moment. But first, a quick “lingo” lesson:
- FHA loans are simply mortgage loans that get insured by the Federal Housing Administration, which is part of HUD. This government insurance protects the lenders that originate these loans from financial losses that might result from borrower default.
- Conventional loans, on the other hand, are not insured or guaranteed by the government. They are originated (and sometimes insured) within the private sector with no federal backing.
Most home buyers in Washington State and nationwide use conventional loans to finance their purchases. Same goes for homeowners who are refinancing. This has long been the case. But the gap between conventional and FHA loan share seems to have widened even more over the last year or so, as shown in the report mentioned earlier.
Minimum Down Payments Are More Closely Aligned
There was a time when most conventional loans required a down payment of 5% or more. FHA, on the other hand, has long offered a down payment as low as 3.5% of the purchase price or appraised value. So in the past, a lot of home buyers in Washington flocked to the FHA program to enjoy a lower upfront investment.
But that has changed over the last couple of years. Fannie Mae and Freddie Mac, the two corporations that buy loans from lenders, have both increased their maximum allowable loan-to-value (LTV) ratios to 97%. That means eligible borrowers who use a conventional loan can now make down payments as low as 3%. In other words, Freddie and Fannie have put themselves in direct competition with FHA.
This is probably a big reason why FHA’s loan share in Washington State and nationwide has dropped over the last couple of years.
Mortgage Insurance and Other Considerations
It’s also worth noting that the mortgage insurance applied to FHA loans stays with the borrower for as long as they keep the loan (at least in most cases). In contrast, private mortgage insurance for a conventional loan can usually can be cancelled once the homeowner has reached a certain equity level. And those borrowers who put down 20% or more on a conventional loan can typically avoid mortgage insurance altogether. So there’s a lot to consider.
This is just one way that the mortgage market has changed over the last few years. Home buyers in Washington have a lot of factors to consider when choosing a financing path. That’s why it’s so important to speak to a knowledgable loan officer (like ours) about your options.