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FHA loans drop off as housing market recovers

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FHA LoanWhile the housing market is far from a complete recovery, it is making progress. The S&P Case-Shiller 20-City Composite Home Price Index rose 12 percent between July 2012 and July 2013, according to the most recent numbers, and just about every facet of the housing market is showing improvement. With the economic situation improving (albeit slowly), more buyers feel comfortable with their options and lenders are more open to extending credit.

With these changes, FHA loans, which had gained in popularity during the Great Recession, are dropping off. More homebuyers seem to be looking to conventional loans.

Reduction in FHA-backed loans

The FHA loan program is designed to encourage homeownership. It’s possible to purchase a home with a down payment as low as 3.5 percent. Prior to the financial crisis, homebuyers could buy homes with no money down, minimal income documentation, and all sorts of “creative” financing that made it appear that they could “afford” bigger homes. The FHA loan program, which required (at the time) a down payment of at least 2.5 percent and substantial documentation, was unpopular in such a climate.

But during the Great Recession and its aftermath, many homeowners turned to these loans as many conventional lenders began requiring anywhere between 5 percent and 20 percent of a home’s purchase price as a down payment. Indeed, in 2009, FHA loans accounted for 20 percent of the dollar volume in home loans, a big increase over the 3 percent share they had in 2006.

Now that lenders have begun to ease borrowing requirements and the FHA has substantially increased fees for borrowers, convention loans are starting to make a comeback. According to the Consumer Financial Protection Bureau, there were a little less than 1.3 million FHA loan originations in 2012. This is down from more than 1.4 million in 2010, but still much higher than they were prior to the 2008 financial crash. In 2007, when I purchased my home with the help of a loan backed by the FHA, only 278,393 FHA loans were issued.

To me, it’s not surprising that FHA lending is still above pre-recession levels. FHA loans are a little more forgiving when it comes to your credit score. The down payment requirements aren’t as onerous, and there are advantages if you decide to refinance to a lower mortgage rate.

Overall, there were 5.9 million refinance mortgages of all types originated last year, up from 3.8 million in 2011. There were also 2.3 million home purchase originations in 2012, an increase over 2011′s total of 2.1 million.

Refinancing your FHA loan

If you have a loan backed by the FHA, there is a good chance that you qualify to refinance to a lower rate. If you’re disappointed that you don’t have the equity required to refinance to today’s still very low mortgage rates, the HARP program might be able to help. I refinanced my home loan using HARP earlier this year, and the process was streamlined. No appraisal was needed, and everything went fairly smoothly.

With concerns that the upcoming Fed taper will result in higher interest rates, many homebuyers and homeowners are preparing to make their moves. If you are having trouble qualifying for a conventional mortgage, or if it’s difficult to convince your lender to refinance your FHA home loan, you can look into what the government has to offer in terms of housing programs.

You might be able to find the housing deal that you want after all.

(Photo: USDA)

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8 Responses to “FHA loans drop off as housing market recovers”

  1. Marko101 says:

    So, you got an FHA loan because you had a poor credit history and then you got refinanced through HARP? Doesn’t sound like you’re responsible enough to be giving advice.

    • Miranda says:

      I financed my home with the FHA loan because a conventional loan is hard to come by when you are self-employed. My family’s primary income has always come from my freelance income. My credit was (and still is) “excellent.” HARP is the program designed for homeowners who find themselves unable to refinance in the current climate due to dramatic drops in home values. My HARP refinance provided the means to take advantage of the current low rates, since I bought before the crash, when even the best rates (which I qualified for) were much higher. That is the point of the HARP program. It is not the same as the other programs offered designed for modification.

      • Miranda says:

        Also, due to the documentation requirements of the FHA loan, I went through an income audit (since I am self-employed) in order to qualify. Because of my situation, I actually had to prove my finances in good shape to qualify for the FHA loan. While I’ve made financial mistakes in the past, by the time I bought my home, I’d mostly cleaned those up and my family was in a very stable position.

  2. NateUVM says:

    Wow. First one of these I’ve seen on this site…

  3. NateUVM says:

    Is it possible that sellers are opting to sell to buyers that will require less documentation (read: fewer potential hangups at closing) and are able to place more money down (read: are less likely to renege on the deal) and that may also drive down the number of FHA loans? That they are able to be a bit more choosy due to the increased demand for housing?

    Probably way off base, but thought it might be a factor.

  4. Claes says:

    Nate: It wouldn’t surprise me if, in highly competitive markets, the extra documentation for and FHA loan might put buyers at a disadvantage.

  5. Brandon says:

    Marko101,

    I don’t think you have anywhere near enough info to make any of those (asinine) claims/assumptions.

  6. NateUVM says:

    @Marko101: Wow, where to start…

    What good is advice from someone who hasn’t been through it before?

    Also, doesn’t it show financial responsibility to take advantage of programs like HARP, when it applies, to better your financial outlook/standing?

    Asanine only begins to describe your ill-conceived post.


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