Recent FHA Loan Changes Decmber 2013

Three Recent Changes in the FHA Loans that a Military Family should know

by Karina Gafford
MilitaryByOwner staff writer

With a lower funding fee than the VA loan—1.75-percent as opposed to the 3-percent that most qualify for with the VA loan, more relaxed credit score requirements, and only a 3.5-percent down payment, the Federal Housing Authority’s loan (FHA loan) has remained an attractive option for military families seeking to buy a family home at a new duty station. Recent changes in both the market and the FHA itself may cause the FHA mortgage-backing program to significantly decline in desirability, quickly. To make sure that you select the loan product that best fits your specific situation, contact one of MilitaryByOwner’s partners for a discussion on whether an FHA loan may suit your next home purchase.
 
  1. Why Would a Military Family Use an FHA Loan When The VA Loan Exists?
While the FHA loan does come strapped with more fees than a VA and more mortgage insurance than a conventional loan, military families may still often consider the FHA loan in place of either a VA loan or a conventional loan when making the decision to purchase a home. If a servicemember already has a VA loan on a property at a previous duty station, for instance, the FHA loan may make more sense than procuring a second VA loan, particularly if the loan is for less than the amount that a lender will secure a second VA (usually a minimum of $147,000). The conventional loan, meanwhile, generally requires a down payment of ten to twenty-percent, and increasingly the down payment reflects the twenty-percent figure more so than ten.   
While a twenty-percent down payment may seem an inordinate amount of cash to put aside for the purchase of a home, back in the 1920s, it was typical for a family to need a 50-percent down payment for a mortgage (then again, an average home in the Roaring Twenties cost roughly the sum of two years’ worth of salary, so perhaps this comparison is a little unfair). Given that the average home in the US cost roughly $207,300, according to the National Association of Realtors Report in 2013, a twenty-percent down payment would amount to $41,460, and that does not even include any closing costs. Ouch! This down payment alone represents 79-percent of the median household income in the US, which the Census Bureau reported as $52,762 in 2012. A 3.5-percent down payment of $7,255.50 for that same house seems eminently more affordable by comparison. 
 
  1. Why the FHA Exists
The FHA, therefore, arose to help families who could not afford the hefty 50-percent down payment achieve the American Dream of homeownership over ten years before the VA loan arrived in the form of the Servicemember’s Readjustment Act toward the end of World War II. A part of the Depression-era New Deal programs of the 1930s, the FHA loan aimed to help families in the low to middle income brackets purchase a home with the two-fold intent of kick starting the suffering housing industry. The agency itself does not make loans; however, they do serve as a government-run mortgage insurance company that backs loans made by other lenders.   The express purpose of backing these loans is to encourage financial institutions to provide loans to those who otherwise would not receive them because of lower credit scores, lower available reserve funds, or lower available down payments.
 
  1. And Where It May Have All Went Wrong for the FHA…
Since the start of the Great Recession of the 21st Century, however, the FHA has vastly expanded its reach to the point of seeming unsustainability.  While other lenders tightened their lending belts to prevent further losses during the Great Recession, the FHA took on riskier loans at a larger rate than previously, helping provide loans to those who could not achieve them independently. In 2006, the FHA had approximately a 5-percent market share of insuring new loans, but by 2011, that share expanded to almost 20-percent of the entire market. Since 2009 alone, the FHA has provided 7 million loans, and in September 2013, it still insured 19-percent of all houses sold that month; whereas, conventional loans represented 70-percent of the market in that same month. Further, the FHA began helping families purchase homes in excess of $700,000. While a quarter of a million dollars may not purchase much of a home in downtown Manhattan, for the rest of the country, that amount could easily purchase several comfortable family homes. Near Minot AFB, the average home sold for $196,209 last year; near Fort Bliss in Texas, the average home sold for $283,333. Only homes near pricey bases, such as Camp Smith in Hawaii even begin to reach the $700,000 figure for their average homes. Given that approximately one in every eight FHA-backed homes defaults on mortgages, though, the prospective debts that the agency could accrue are staggering. 
 
Aside from the fact that the FHA is backed by you, the taxpayer, the large debts held by the agency have second order effects that may impact your life—a need for the FHA to pass the cost burden back onto the consumer. This cost burden means that now when you consider your loan options, the FHA reflects a considerably less desirable option than it did several years ago given higher fees in the form of mortgage insurance and comparatively higher interest rates, too. The FHA’s quick transition from Generous Lending Uncle to Ruthless Loan Shark over the last year makes sense when you consider the rate of return they are receiving. If you, for example, regularly loaned $10 of lunch money to your buddy, but knew that you would only ever receive $70 back for every $80 you loaned, you may consider raising your interest rates to offset the missing $10, too (don’t actually charge your friends interest on borrowed lunch money—that makes them "clients," not "friends!").
 
Given these losses, for the first time in the history of the 79-year-old agency, the Federal Housing Administration (FHA) has requested and received a large cash infusion from the Department of Treasury to help cover some of the losses incurred by the increasing number of risky mortgages it has insured over the past few years. According to the Associated Press (AP), the Federal Housing Commissioner Carol Galante explained that the agency needed $1.7 billion, and that it did not need the approval of Congress to withdraw the sum from the treasury. The agency is required by law to maintain a certain amount of reserves to protect against losses from defaults, Galante explained in a hearing on Capitol Hill. According to the Federal Credit Reform Act of 1990 (FCRA), the FHA must maintain sufficient liquid reserve funding to cover any projected losses for a period of 30-years. If the projected amount dips below 2-percent of all mortgages insured by the FHA at any given time, then the agency may request an inter-governmental transfer of loans. The FHA has an unlimited credit line with the Treasury for this purpose. On the plus side, since the amount the FHA will receive comes from within the government, this amount will not increase the national deficit.  
Conclusion

For those military families weighing home mortgage options at present, the current FHA loan presents much to consider. Higher fees, higher interest rates, and property mortgage insurance for the life of the loan make the FHA loan a highly expensive option.   Just because the mortgage insurance and higher fees may present a seemingly unappealing option, though, do not entirely discount the FHA loan. For those who suffered credit losses as a result of job loss during the recession or because a military spouse could not quickly find necessary employment at a new duty station, an FHA loan does have an upside. This loan may prove the quickest way to get back into the housing market while home prices are still low.   Those who wait several years for their credit rate to recover in order to get a conventional loan with a lower interest rate may find that the gain in house prices quickly offsets any loss they may have taken by paying mortgage insurance for an FHA loan now.   If you are still trying to make the decision between the various loan products available, contact one of MilitaryByOwner’s partners to discuss your specific options.