New FHA Rate Cuts Costing Homebuyers?

Remember our December 29, 2014 blog about the state of the 2015 Real Estate market? We told you the forecasts for 2015 were looking relatively bright and sunny, “fueled by significant improvements in economic fundamentals, low mortgage rates, and compressed inventory”, according to Realtor.com®’s 2014 Housing Review. 

We also said a rise in jobs has led to an increase of the nation’s Gross Domestic Product (GDP), and rates are at an all-time low, increasing consumer motivation to buy a home. Things were looking swell for cash-strapped millennial homebuyers. One of the biggest challenges for them and all potential home buyers would have been the competition since the availability of homes is somewhat scarce in early 2015.

Well, now we can add a new complication for these young borrowers to the mix. Although the following plan presents fewer challenges for home buyers in general, it may be a hardship for them. President Obama announced a “3% down loan program” in December that will challenge homebuyers even more. The Federal Housing Administration (FHA) will cut its mortgage insurance premiums on its loans from 1.35% to 0.85% for new borrowers electing the 30-year, fixed-rate mortgage beginning January 26.  This change is now predicted to bring in more than 250,000 new homebuyers to the closing table.

The FHA’s new program is reportedly an attempt to restore the market to a state in which buyers are no longer paying inordinate annual fees. Previously, the average homebuyer has had to fork over an average of $1,600 a year, a dollar amount significantly higher than seen before the nation’s economic crisis.  The new program is expected to now save buyers an average of $900. By reducing premiums, saving consumers money, and reducing stringent lending standards, the FHA hopes to (somewhat) restore the normalcy of yesteryear to consumers searching for a new home.

This may be bad news for cash-poor millennials, who were expected to flood the home-buying market this year per this year’s market forecast. With a 3-3.5% down payment required, their options appear somewhat limited. Should they elect to do the lower-rate FHA loan and pay 1.75% mortgage insurance up-front as well as their 0.85% premiums for 30 years? Or do they choose one of Freddie Mac’s or Fannie Mae’s 3% down payment loan, in which they would need stellar credit? If they choose either one of these, borrowers will still be required to purchase mortgage insurance until the equity in their home is up to 20%. Plenty of cash up-front as well as a good credit score will behoove them in the home-buying process.

However, millennials aside, the FHA’s new 3-3.5% down home loan program could lift barriers for home buyers in general. Of course, there are naysayers who claim this could lead to another huge bailout for the mortgage industry, but that remains to be seen. For now, most homebuyers  can enjoy the lower rates.  

Whoever you are--millennials, rookie home-buyers, retirees--it doesn't matter--we can help put you in the home you've always imagined yourself in (or help you sell the one you're tired of!). Call us today and get a free market analysis or home value analysis. (210) 566-6355.