FHA loans are a popular financing option among home buyers in Washington and Oregon, two of the states we serve. In fact, first-time home buyers account for more than 80% of all FHA loan originations in the current mortgage market. That’s just one of the insights offered in a new report by the Urban Institute.
Most FHA Loans Go to First-Time Home Buyers
In August 2018 the Urban Institute (an economic think tank based in Washington, D.C.) published a new report about first-time home buyers, mortgage lending, and related topics. One of the key insights related to FHA loans.
A lot of first-time home buyers in Washington and Oregon still favor the Federal Housing Administration’s mortgage insurance program. In those states and elsewhere across the country, first-timers make up 83% of FHA loan originations. That’s up from around 75% during the recession.
Definition: An FHA loan is originated within the private sector, like other types of mortgages. But it’s also insured by the federal government. This insurance protects lenders from losses relating to borrower default. As a result of this backing, the qualification criteria for FHA loans can be more “forgiving” than other mortgage programs.
To quote the August 2018 report:
“The Federal Housing Administration (FHA), which makes low-down payment loans available to borrowers with less than perfect credit, has typically focused on the first-time homebuyer market, with first-timers making up about 80 percent of their total originations. That share fell to around 75 percent during the recession but has slowly crept up to nearly 83 percent today.”
Low Down Payment, Flexible Criteria
Based on this report, it’s clear that a lot of first-time buyers in Washington and Oregon prefer to use FHA loans. But why? What is it about this program that attracts first-timers. Here are two of the biggest reasons:
- This mortgage program allows borrowers to make a down payment as low as 3.5% of the purchase price or appraised value. That’s one of the lowest minimum down payments available for “regular” borrowers who don’t qualify for VA or USDA loans.
- The credit score and debt-to-income requirements for the FHA loan are pretty flexible, when compared to other mortgage programs. So borrowers with less-than-perfect credit and/or a high level of household debt often turn to this program for financing.
Conventional Mortgage Loans Become More Competitive
Over the last few years, conventional loans have started to compete with the FHA program in the low-down-payment department. Thanks to policy changes made by Fannie Mae and Freddie Mac, eligible first-time buyers in Washington and Oregon can now qualify for a conventional loan with a down payment as low as 3%.
FHA and conventional loans might be competitive when it comes to down payments. But there are some key differences when it comes to mortgage insurance.
Borrowers who use a conventional home loan with a low down payment usually have to pay for private mortgage insurance (PMI). But the insurance policy can be cancelled later on, when the homeowner’s equity rises to a certain level. With the FHA program, on the other hand, most buyers have to pay mortgage insurance for as long as they keep the loan.