As demand picks up for government loans favored by entry-level buyers, the average purchase mortgage request has shrunk by 10 percent, to $413,500.

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Rising rates are not only crimping demand for mortgages, but homebuyers are asking for smaller loans when they do apply, according to a weekly survey of lenders by the Mortgage Bankers Association.

At $413,500, last week’s average purchase loan request last week was down 10 percent from the record high of $460,000 seen in March, the MBA survey found. That doesn’t necessarily mean home prices are dropping — for now, home price appreciation is only slowing in most markets, not reversing — but it could reflect a change in who’s looking to buy.

Demand for FHA, VA and USDA purchase loans favored by many entry-level buyers picked up last week, with loan requests for those government-backed loans averaging $321,600. Homebuyers seeking conventional, conforming loans eligible for purchase by Fannie Mae and Freddie Mac sought bigger loans, averaging $441,500.

Joel Kan

“Overall purchase activity has weakened in recent months due to the quick jump in mortgage rates, high home prices, and growing economic uncertainty,”  said MBA forecaster Joel Kan, in a statement. “Purchase applications were essentially flat last week but were supported by a 6 percent increase in government loans.”

Despite a slight pullback in mortgage rates — the first in three weeks — purchase applications were essentially unchanged last week, rising by a seasonally adjusted 0.1 percent from the week before. Demand for purchase loans was down 24 percent from the same time a year ago.

A 14 basis-point drop in rates on 30-year fixed-rate loans, to 5.84 percent, generated a slight increase in applications to refinance. While applications to refinance were up 2 percent week-over-week, demand for refinancing is down 80 percent from a year ago.

Applications for FHA-backed loans accounted for 12 percent of all mortgage requests, while 11.2 percent of applications were for VA-backed loans. USDA loan requests accounted for 0.6 percent of applications.

Mortgage rates level off

According to the Optimal Blue Mortgage Market Indices, rates on 30-year fixed-rate mortgages hit a 2022 peak of 6.056 percent on June 14, but have since retreated below the 6 percent threshold.

Rates on jumbo mortgages, which are typically offered only to borrowers with excellent credit, are closer to 5 percent. While FHA-backed loans carry the lowest rates, borrowers also shoulder the burden of up-front and annual mortgage insurance premiums.

Mortgage rates have been on the rise this year, as the Federal Reserve gradually tightens monetary policy to fight inflation. Central bank policymakers are simultaneously raising short-term interest rates and trimming the Fed’s nearly $9 trillion balance sheet.

The MBA reported average rates for the following types of loans during the week ending June 24:

  • For 30-year fixed-rate conforming mortgages (loan balances of $647,200 or less), rates averaged 5.84 percent, down from 5.98 percent the week before. With points decreasing to 0.64 from 0.77 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans, the effective rate also decreased to 6.02 percent.
  • Rates for 30-year fixed-rate jumbo mortgages (loan balances greater than $647,200) averaged 5.42 percent, down from 5.49 percent the week before. With points decreasing to 0.28 from 0.45 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased to 5.50 percent.
  • For 30-year fixed-rate FHA mortgages, rates held steady at 5.62 percent. But with points decreasing to 1.15 from 1.18 (including the origination fee) for 80 percent LTV loans, the effective rate decreased from last week, to 5.95 percent.
  • Rates for 15-year fixed-rate mortgages, which are popular with borrowers refinancing existing loans, rates averaged 5.06 percent, essentially unchanged from 5.05 percent the week before. With points decreasing to 0.72 from 0.86 (including the origination fee) for 80 percent LTV loans, the effective rate decreased to 5.24 percent.
  • For 5/1 adjustable rate mortgages (ARMs), rates averaged 4.64 percent, down from 4.78 percent the week before. With points decreasing to 0.72 from 0.84 (including the origination fee) for 80 percent LTV loans, the effective rate also decreased to 4.91 percent.

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Email Matt Carter

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