|ELLIOT NJUS, The Oregonian|
First-time homebuyers without much cash to bring to the table are getting more backing from private lenders as the federal government eases back on its efforts to keep the real estate market accessible.
Buyers might not pick up the change, but mortgage brokers are increasingly steering buyers toward conventional loans from private lenders.
That's because the
FHA loans remain just about the only choice for people with enough cash for only a 3.5 percent down payment or those with less than stellar credit. But they'll end up paying considerable mortgage insurance costs in the long run.
"Now we're doing everything we can to avoid FHA," said
The federal mortgage-insuring agency was created after the Great Depression to free up homebuying capital, especially in bad times when banks are hesitant to lend.
And as times turned bad during the housing crash, the agency went from insuring 3.8 percent of home loans in 2006 to 19 percent in 2010. But there's no secret sauce that protected the agency from costly defaults at a time when home values were falling. By 2012 the agency had rung up a projected deficit of
Since 2010 the FHA has periodically raised mortgage-insurance premiums paid by buyers on top of their monthly mortgage payments.
And in June it changed its policies to require low down payment borrowers to pay mortgage insurance over the entire life of the loan. Previously the mortgage insurance payments stopped after 22 percent of the value of the home was paid off and the buyer had equity that considerably reduced the risk of default.
But the timing was good, as private lenders have been eager to get back in the loan business once the economy showed signs of improvement.
As home prices reversed course and started to climb, private mortgage insurance companies that took considerable losses in the crash have started to re-emerge.
That opened the door for private lenders, who need private insurers on board to resell low down payment loans on the secondary market. As the costs associated with FHA loans have increased, private conventional loans are looking more and more competitive.
For a hypothetical buyer with good credit making a 5 percent down payment on a
After 10 years a homeowner with the conventional loan would have paid
Low down payments were a hallmark of the housing bubble. Many who bought a home around the time prices peaked found themselves underwater because they started out with almost no equity.
But lenders and consumer advocates say that requiring substantial down payments lock out too many first-time homebuyers. (Investors buying properties they won't live in are generally still required to put 20 percent down.)
"I'm a big believer that we cannot repeat the sins that the industry made, and down payments are a part of that," said
"It's a balance you've got to find. It can't be too aggressive, and it can't be too tight," Hanna said. "I would say we're nowhere near what would equate to aggressive lending."
What has changed is that credit standards, effectively nonexistent during the bubble, are much stricter. Income and assets must be verified.
Credit standards for FHA loans are usually less strict than for conventional loans. Those with bruised credit may find an FHA loan is their only option.
And conventional loans that will accept a down payment of less than 5 percent exist, but they're rare and expensive. Most borrowers who have only 3.5 percent to put down will still look to the FHA.
If they could come up with the difference, they could save on the additional fees, not to mention less interest.
"In almost all cases, I let them know that if they have 5 percent down, the conventional loan is better economically than the FHA loan," said
But it's rare that somebody decides to wait until they can come up with the extra money.
"In most cases they're willing to accept those negatives because they're stretching to close in the first place," he said.
|Copyright:||(c) 2013 Oregonian Publishing Co.|
|Source:||Advance Publications, Inc.|