Although it has raised fees, the FHA continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments than conventional lenders.
Is the Federal Housing Administration losing some of its post-boom, post-bust oomph? Is the Obama administration’s plan to gradually throttle back the FHA’s home mortgage insurance volume already having effects — and if so, what might this mean to you as a buyer? There are definitely signs that something is brewing:
•Total applications for FHA-insured single-family mortgages are down 30% year over year through March, according to the agency’s data. Applications from prospective home purchasers are down 35%. The FHA’s popularity with buyers previously had sustained its high origination volumes.
•The FHA put its second increase in premium charges in six months into effect April 18. Higher premiums mean higher monthly payment requirements for buyers and could have the effect of squeezing some consumers with tight budgets out of the market entirely.
•The private mortgage insurance industry, which competes with the FHA for borrowers who make small down payments, is touting its newly resurgent conventional mortgage products, which may offer significant monthly savings compared with the FHA.
•Some of the agency’s long-standing advocates are wondering aloud whether the administration’s policy tilt toward more private-sector involvement in the mortgage arena may be hurting first-time buyers who can’t bring large cash resources or high credit scores to the table.
“Here you have our last refuge for ordinary people to buy a home, and the government is making it tougher to qualify” by raising insurance premiums, said Mario Yeaman, senior loan officer for Milestone Mortgage in Manhattan Beach.
Brian Chappelle, a principal of Potomac Partners, a mortgage banking industry consulting firm in Washington, D.C., said he worried about the direction the FHA had begun pursuing. “FHA’s role was designed to be the first rung on the homeownership ladder. If you raise fees, increase down payments and lower mortgage limits, it would be a serious impediment for future buyers and the economy.”
Chappelle’s concern about higher down payments stems from the Obama administration’s February “white paper” on housing reform in which policymakers called for higher down payments across the board — including at the FHA. To date, no increases have been proposed by the agency, but some analysts believe that a move to a 5% minimum down payment — up from the current 3.5% — would not be surprising in the months ahead. The FHA’s maximum loan amounts might also drop significantly in October if Congress does not renew the economic recovery law ceilings, which now top out in high-cost areas at $729,750.
Given these developments, how does FHA financing stack up against rivals in the low-down-payment space? Private mortgage insurers have a quick response: They say their lower monthly costs already are winning back some of the business they lost to the FHA during the recession.
For instance, Radian Guaranty Inc., a major home loan insurer, claims that in the wake of the FHA’s premium increases, a low-down-payment conventional mortgage carrying its insurance coverage requires monthly payments 15% lower than FHA-insured mortgages for borrowers with FICO credit scores above 720.
Radian provided this cost-comparison example to illustrate: Say you’ve got a FICO score above 720, and you need a $285,000, 30-year loan with 5% down at a 5% interest rate. The FHA mortgage would cost $1,806 in principal and interest a month. The same loan insured by Radian would cost from $1,530 to $1,753 a month, depending on the type of premium payment plan you chose.
Brien McMahon, chief franchise officer of Radian, said that as a general rule, private insurance on low-down-payment loans would beat the FHA whenever the buyer put down 5% and had a 720 or higher FICO score or put down 10% and had at least a 680 FICO.
So does this mean that all buyers with low down payments should abandon the FHA and switch to conventional loans? Hardly. David Van Waldick of Western Realty Finance in Carlsbad, Calif., said the majority of FHA users couldn’t fit into the private insurers’ high-FICO, strict-underwriting model, so those vaunted savings may be illusory.
The FHA, by contrast, continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won’t touch.
Bottom line: If you’re purchasing a home with a small down payment, check out both the FHA and the private alternative with your loan officer. It’s true that the FHA has just gotten a little more expensive. But it may still have the total package you need to do the deal.