Why Aren’t First-Time Homebuyers Using FHA?
The Federal Housing Administration has insured more than 47.5 million properties since the program was created in 1934, making it the largest mortgage insurer in the world. With its 3.5 percent down payment and notoriously favorable lending standards, FHA mortgages have been the top choice for first-time homebuyers since the housing recovery began five years ago. However, times are changing.
Despite shrinking inventories of affordable homes for sale and soaring home prices, first-time buyers have become the most important demographic in real estate. More than 2 million first-time buyers became homeowners last year. That’s more than one-third of all homes sold in 2017. With more than 995,000 sales in the first half of 2018, the first-time buyer market is stronger than it has been since 2005.
For the first time in history, in the third quarter of 2018, more first-time buyers chose conventional mortgages over FHA according to the quarterly First Time Buyer report from Genworth Mortgage Insurance. By the first quarter of 2018, the most recent data available from the Department of Housing and Urban Development showed that FHA’s share of purchase mortgages (mortgage to buy a home rather than refinance one) had fallen to 14.2 percent of all purchase mortgages, down from a recent high of 18.4 percent in the fourth quarter of 2016.
“The FHA loan is not the default low-down payment mortgage choice for buyers of homes anymore. There are other, less-expensive options,” says Dan Green, a former loan officer and expert on mortgage finance.
At a time when the first-time buyer business is booming, why is FHA losing market share?
New Competition From Conventional Lenders
The primary cause of FHA’s decline are dozens of new conventional low-down-payment products designed for the first-time buyer market. The most popular are two different 3 percent down mortgages introduced by Fannie Mae and Freddie Mac. The two GSE’s also are the primary purchases of a wide variety of new products from large and small mortgage lenders.
Some conventional lenders have even created new “zero down” mortgages where lenders offer a 3 percent down the loan. They give the borrowers a “grant” for the down payment and sell the loan to Fannie or Freddie.
Grants or tax credits are also available in some low-down-payment programs offered by more than 2400 local and state housing finance agencies. Some of these are for first responders, teachers and municipal workers to help them buy a home close to their place of work.
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