Anyone with a less than perfect credit rating is likely to find it pretty hard to get a loan these days, but it also seems as if FHA fees are holding back a full housing market recovery.
An article in American Banker points out that the Federal Housing Administration has raised its fees so much that many Americans cannot afford them, which is bad news for the economy and the real estate market. According to figures from the National Association of Realtors, the numbers of first time buyers are now at historic lows, at around 28%. This is 6% less than the five-year average, and is far below the 40% figure which is seen as being a benchmark value. This fall in the number of first time buyers has led to the lowest levels of home ownership seen in two decades.
While high FHA fees may be a contributing factor, the recent economic crisis has been particularly hard on young adults aged between 24 and 35, a group that traditionally accounts for many first-time purchases. Large numbers of people in this age group are encumbered with high levels of student debt, and stricter credit conditions have made it much harder for them to get a mortgage.
The Federal Housing Administration provides mortgage insurance for first time buyers, and this is paid for through upfront fees and monthly premiums. If the buyer subsequently defaults then the lender is repaid from the FHA fund. This mortgage insurance has been in place since the 1930s and has helped more than 34 million Americans purchase property. However in recent years the FHA was forced to raise its premiums in order to cover the high number of defaults seen during the financial crisis.
There is no doubt this was necessary at the time, but fees still remain high some five years on. These can add an additional $120 onto a monthly mortgage payment on an $180,000 loan. In addition the upfront fee has increased from 1% of the loan to 1.75%. Apparently these increases in premiums pushed 1.5 million people renting property over sustainable debt to income levels required to qualify for home loan last year.
This year it’s expected the FHA will help approximately 450,000 first-time buyers, but while this figure may seem huge it’s around a third lower than it should be. Between 2009 and 2013 the FHA helped approximately 690,000 first-time buyers each year. The article in American Banker points out that a new approach will be necessary if the economy is to benefit from an increase in first-time home purchases.