After several years of lackluster participation in the housing market, first-time homebuyers are getting a boost from the Federal Housing Administration (FHA) this year.
Last year, the percentage of homes sold to first-time buyers remained at 29 percent for the second straight year, which represented that demographic’s lowest market share since 1987, according to a study from the National Association of Realtors (NAR). In addition, overall existing-home sales dropped 3.1 percent from 2013, although median home prices increased to their highest level since 2007. On Jan. 8, in a move expected to bolster homeownership, President Obama and the FHA announced that they were cutting annual mortgage insurance premiums (MIP) for new borrowers.
Effective Jan. 26, the annual premium decreased from about 1.35 percent of the loan balance down to 0.85 percent, depending on loan parameters. The FHA predicts this will save the average FHA homebuyer roughly $900 a year. These estimates may be on the low side, however, particularly for buyers with larger mortgage balances. For instance, this past third quarter, the median home sales price in the New York City metropolitan area was $410,800. At the previous MIP, a homebuyer at this price would pay $5,445.35 in MIP annually; a buyer who purchases that same home with the new reduced MIP, however, will pay only $3,428.55 annually, a savings of more than $2,000. Of course, even at just $900 annually, the reduced premiums could mean saving as much as $27,000 over the life of a 30-year mortgage.
While these numbers are encouraging, this reduction may mean more than just a lower monthly bill for potential buyers. Annual premiums are included when calculating borrowers’ debt-to-income ratio, and the lower rates could help borrowers who previously did not qualify to meet the 43 percent FHA limit for the debt-to-income ratio. In addition, the subsequent savings may also help homebuyers qualify for larger purchases, allowing them to get more house for their money. By lowering the cost of homeownership, the FHA may increase the pool of potential homebuyers, particularly in the previously sluggish first-time homebuyer market.
With slow wage growth and tightened credit standards in the past several years, borrowers with lower down payments and credit scores have struggled to qualify for homeownership. Even FHA loans, which are designed to help this market segment, were unable to reach many potential borrowers due to decreased loan limits and increased premiums. This latest move by the FHA, however, seems to be acknowledging the need for additional help to jump-start the first-time homebuyer market. In fact, the FHA estimates that, over the next three years, this reduction will spur 250,000 new buyers to purchase their first home.
Real estate agents working with first-time homebuyers or borrowers with lower credit scores should be aware of how these MIP reductions affect their clients’ purchasing power. In addition to offering lower-cost mortgages with down payment requirements as low as 3.5 percent, the FHA’s mortgage programs offer a variety of products and support that eases the way for underserved borrowers who would otherwise be shut out of homeownership. FHA-insured mortgages may be the answer for many of these potential homebuyers.
As the year progresses and first-time buyers come back into the market, it could create a ripple effect throughout the industry. If demand for starter homes increases, it may incentivize more move-up buyers as well, and 2015 could see an increase in overall sales as fresh buyers and sellers come off the sidelines.
Ray Brousseau serves as executive vice president of Carrington Mortgage Services.