Earlier this year, the Federal Housing Administration (FHA) announced a significant reduction in its mortgage insurance premiums (MIP) for new borrowers. Many hoped that this reduction would spur more home sales, particularly for first-time homebuyers.
The policy has been in place for nearly a year, and FHA loan activity has escalated significantly in a short period. In the government’s fiscal third quarter (April through June), FHA loan volumes rose to $66 billion, a 101 percent year-over-year increase. Loan counts increased, as well, climbing 73 percent compared to the same period in 2014.
Although these figures seem promising, the increases were spurred largely by refinances, particularly from borrowers who refinanced current FHA loans into new FHA loans with lower premiums.
An increase in buying power
In fact, these FHA-to-FHA refinances increased 257 percent this past fiscal third quarter, while overall refinance counts increased 198 percent year-over-year. This was a significant benefit to existing borrowers, as it allowed them to refinance their current loans to take advantage of the lower premiums and reduce their monthly payments.
The premium reduction did have some positive effect on housing sales, as well. Some borrowers were able to qualify for and take out larger loans than in previous years.
According to data from RealtyTrac, the average loan amount for FHA purchase loans increased from $187,718 in Q1 2011 to $197,315 this past second quarter. This represented a 16-quarter high for FHA purchase loans.
Also, FHA purchase loan originations have grown somewhat; in this past second quarter, FHA purchase loan originations increased 36 percent from second quarter 2014.
Clearly, some buyers recognize the increased buying power that the FHA premium reduction has afforded them, but why aren’t more seeing it?
Where are the buyers?
Borrowers not utilizing the resources available to them represent a serious opportunity in the marketplace for real estate agents who are aware and know how to seize it.
Being familiar with the FHA loan process, its requirements and lenders that specialize in these loans could be a serious boost to your business.
Real estate agents must use all the tools at their disposal to help potential homebuyers break into the housing market, and FHA purchase loans and FHA 203(k) loans for purchase and rehabilitation could be just what today’s homebuyers need.
In addition to reduced mortgage insurance premiums, which are helping more borrowers qualify and at larger amounts, the FHA also offers an appealing alternative to conventional loans as interest rates begin to rise.
FHA loans typically require a lower down payment (as low as 3.5 percent), and many lenders allow for lower credit scores (some as low as 550), as well.
For potential buyers who are looking at homes in need of serious repairs or rehabilitation, the FHA also offers the 203(k) loan, which allows borrowers to roll the costs of renovations into the overall mortgage.
How you can help homebuyers
For real estate agents who are unfamiliar with FHA and other government loans, they should look to partner with lenders who have significant experience with these types of loans. Not only will these lenders be able to help educate you on the finer points of these loans, but they will also be better able to serve your clients.
If you have clients with lower credit scores and lower down payments, you should look closely at any potential lending partner’s ability to manually underwrite loans and to provide a continuum of support for its customers.
Does the lender service the loans they originate? This can be critical, especially with lower-credit-score originations. By researching and partnering with experienced FHA lenders, you can enter this market niche with confidence and build your business accordingly.
Real estate agents who are prepared to inform borrowers about the opportunities that the FHA loan programs offer potential homebuyers can help their business — and even expand it in the face of upcoming interest rate increases.
FHA loans are powerful tools in the housing market today, and real estate agents should not overlook the potential to increase their sales.
By partnering with lenders that are experienced in FHA and government loans, real estate agents can learn more about the loans themselves and how they can better utilize them to serve their clients — and they can help turn potential homebuyers into homeowners.
Ray Brousseau serves as executive vice president for Carrington Mortgage Services Mortgage Lending Division. Please follow Carrington on Twitter or LinkedIn.