FHA is losing its luster…and rightly so?

According to a recent article in the Wall Street Journal, http://blogs.wsj.com/developments/2013/02/13/mortgage-burden-grows-but-federal-role-is-shrinking/ the FHA is losing market share to the conventional loan market. This, in our opinion, is due to the costs associated with an FHA loan rising. Yes, FHA has a low down payment, but the monthly and upfront mortgage insurance that are associated with FHA are making the product less attractive. If a borrower can save up 3.5% for the FHA option, they should be able to save the little bit more to go conventional with 5% down (even some conventional products allow you to do 3% down anyway**as of press time this is no longer available). There is no upfront MI with conventional and the monthly mi costs can be less than their FHA counterpart. Plus, with conventional there are multiple mi options to choose from so there may be a more appropriate solution for the client depending on the logistics of the particular deal and their time frames and housing objectives.

I think more worrisome or important from the article is the ever rising LTV ratio. A rising LTV means less and less equity in a property. The lower the equity the greater the likelihood of default; if our goal is responsible lending then we should advocate a step-by-step increase to the down payment requirement (say, 1% a year for the next 20 years–slow and telegraphed allows market to anticipate and digest the coming increase) of any government backed loan (or any loan that is made by a bank that would have to be bailed out by the tax payer). An article in DS news discussing a Northwestern study http://www.dsnews.com/articles/who-walks-out-new-studies-shed-light-on-strategic-defaults-2009-09-29 which finds that negative equity is the driving factor in strategic defaults (not surprising either).  The bottom line comes down to the details of the specific transaction you may be a part of; we are proponents of preparation + hyper-local market knowledge + timing = successful buying.  Even though FHA has gotten more expensive, depending on the situation, it still may be the right fit for your scenario.  Schedule an appointment to learn more. Happy hunting!