The State of FHA Loans

FHA loans have been an important component of our real estate market over the years.  The key aspect of an FHA loan that distinguishes it from other loans is that FHA loans are government insured.  Anytime you finance a home above 80%, there is some sort of mortgage insurance in place to offset the risky nature of higher financing.  FHA is insured by the government using Mortgage Insurance Premium (MIP) while conventional loans are insured by Private Mortgage Insurance Companies (PMI). In June 2013, FHA made the news because the MIP amounts have increased again and, in some cases, FHA has made it mandatory to carry MIP for the duration of the loan.  This is a major shift in philosophy because previously the MIP could be dropped after five years.  Is this change bad or good?  Is this the end of FHA loans for buyers? It is important to understand the recent history of FHA loans in order to understand why this happened and how we are impacted moving forward.

From 2000-2003, FHA loans had a market share on average of ten percent.  As we moved into the segment of 2004 – 2008, we saw the market share drop an average of five percent.   The drop occurred because of an increase in new loan options.  This included Subprime loans which are now extinct, as well as aggressive Conventional loans that did not require income documentation.  When the real estate market crashed in 2008, we saw the increase of FHA market share jump to 25% in 2009 and average 18.5% during the 2009-2012 years.  So, why the big increase?  Similar to what happens to insurance companies when a hurricane hits, many go under or scale back new policies because of the high volume of active claims.  PMI companies experienced the same thing with the real estate market crash and started going out of business for paying out claims on short sales and foreclosures.  In addition, Subprime loans were no longer available.  This meant that FHA was the only high loan to value program that could offer financing since the government could absorb the losses and still operate.

FHA loans came to the rescue in many ways for our market.  In 2012, FHA market share declined to 11% which is more in line with expectations.   FHA increased the MIP and extended the time frame so they could offset the amount of loans they have insured.  FHA currently has a -2% reserve. This means that if all the loans went delinquent, FHA does not have the reserves to insure them.  Nevertheless, it is not all doom and gloom.  FHA believes it has the strongest book of business ever. They just need to take measures to offset these issues of solvency.  I believe we could easily see these MIP requirements relaxed over the next few years as FHA’s role becomes more in line with their original vision which would loosen some of the stricter
MIP guidelines.

Moving forward, I fully expect FHA loans to be around for buyers.  However, FHA loans are undoubtedly the most polarizing loans in our market mainly due to misinformation.  If you are buying a home, you may realize that FHA is a great loan and meets your needs.  You enjoy the excitement of being pre-approved, but once you begin looking at properties you find that realtors and sellers will not accept FHA financing for some properties.  This happens mainly for two reasons:

Myth #1: FHA appraisals come in at a lower value than Conventional loans
Reality:  Value is value and the comparable sales used for an appraisal will be the same for FHA and Conventional.

Myth #2:  Conventional buyers are stronger than FHA buyers.
Reality: The sign of a strong buyer is that they are a good fit for their loan type.  We can have a borrower who is great for FHA but bad for Conventional or vice versa.  It is important for buyers to understand the difference and be approved accordingly.

FHA is a loan that is here to stay.  Buyers, you should be open to this loan type because it may give you the opportunity to get the home you desire.  Realtors, I implore you to cut FHA some slack and not refuse the financing for your listings. As long as you have a strong pre-approval letter and feel comfortable with the mortgage company that provided it, then an FHA contract offer should not differ from a Conventional one and you can advise your seller accordingly.

There was a time when FHA loans gave buyers the opportunity to purchase a home when mortgage loans were difficult to obtain. This is why we should give them the credit they deserve.