FHA Loan Share Declining
Written By: Joel Palmer, Op-Ed Writer
Fewer first-time homeowners and buyers of newly constructed homes are relying on FHA financing.
According to a recent blog post by the National Association of Home Builders (NAHB) based on U.S. Census data, more than 76 percent of new home sales in the second quarter of this year were financed with conventional loans. This was the largest percentage since the beginning of the Great Recession in 2008, according to NAHB.
This marked an increase from 71.2 percent of conventional financing in the first quarter of 2021. In the second quarter of 2020, conventional loans financed only 66.8 percent of new home sales.
FHA loans, on the other hand, accounted for 12.1 percent of new home sales in the second quarter of 2021, a 6.7 percentage point decline over the prior quarter and 8.3 percentage points lower than the second-quarter 2020 share.
VA loans accounted for 5.1 percent of new home sale financing in the most recent quarter, while 7.1 percent of new home purchases were cash sales.
NAHB attributed the increase in conventional loans and the decrease in FHA funding to the combination of low mortgage rates and robust stock market returns in recent months.
“Higher stock returns and the resulting increased wealth aids borrowers in the underwriting process as well as increasing the downpayment a household can afford (should they cash out some of their portfolio).”
FHA financing is also decreasing among first-time homebuyers and other buyers of existing homes.
According to the latest National Association of Realtors Confidence Index Survey, FHA loans financed 14 percent of all mortgages in July 2021. Though that was up slightly from 12 percent the month before, it was down from 18 percent in June 2020.
Earlier this year, NAR noted that FHA loan share for first-time buyers has been declining slightly each year since 2018. However, it dropped to 24 percent in January 2021, compared with 29 percent for all of 2020.
NAR attributed the trend to the expense of mortgage insurance on FHA loans compared with conventional loans. For conventional loans backed by Fannie Mae and Freddie Mac, private mortgage insurance is not required once the homeowner’s equity reaches 80 percent. In the case of an FHA loan, mortgage insurance is a requirement for the life of the loan, regardless of equity.
NAR noted the potential difference in expense for these options. On a $300,000 home financed with a 30-year fixed loan with a 2.7 percent mortgage rate and PMI of 1.5 percent, an FHA loan would cost more than $15,000 more in mortgage insurance over the life of the loan than for a conventional loan.
While more buyers do not require FHA assistance to own a home, many still do, especially lower income households.
This past week, the Biden Administration announced another series of initiatives to make housing more available to lower-income families, the primary focus of its housing agenda. These initiatives include:
Raising Fannie Mae’s and Freddie Mac’s equity cap for the Low-Income Housing Tax Credit.
Increasing funding to Community Development Finance Institutions and non-profit housing groups for affordable housing production under the Capital Magnet Fund.
Increasing the supply of manufactured housing and 2-4 unit properties by expanding financing through Freddie Mac.
Working with state and local governments to boost housing supply by leveraging existing federal funds and other measures.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
