Rising mortgage rates and an uncertain financial future is prompting house hunters to seek a low down payment mortgage option as finding an affordably priced home remains arduous.
Low downpayment mortgage programs have experienced a recent application surge, as the share of total mortgage applicatios that were Federal Housing Administration (FHA) loads increased to 12.2% from 11.6% the week prior, according to the Mortgage Bankers Association (MBA). VA loan applications increased as well, inching upward from 12.6% from 12.3% the week prior.
Rates hit a high point in mid-November, climbing to an average of 4.125%, which is the highest peak since July 2015.
"Following the election, mortgage rates saw their biggest week-over-week increase since the taper tantrum in June 2013, and reached their highest level since January of this year," said David H. Stevens, CMB, MBA president and CEO in a release. "Investor expectations of faster growth and higher inflation are driving the jump up in rates, and rates have now increased for five of the past six weeks, spurring a commensurate drop in refinance activity."
The U.S. home inventory tumbled for the fifth consecutive quarter in July to near record lows, the longest streak of inventory decline since the housing market bottom in 2012, according to Ralph McLaughlin, chief economist of online residential real estate site Trulia.
Despite easing in some markets throughout Florida and California, Trulia found the number of starter and trade-up homes continues to drop at or near double-digit rates annually on a national level. The downward trajectory of starter and trade-up homes is making affordable homes further out of reach for homebuyers.
"The good news is there are many more low down payment options than ever before for home buyers," says Erin Lantz, vice president and general manger of mortgages for Trulia. "Homebuyers should first do their homework and meet with several lenders and inquire about all their mortgage options. Sometimes an FHA backed mortgage is the best option, but many lenders are offering low down payment conventional mortgages."
Homebuyers may be missing their chance to purchase a home because misconceptions that you must have a 20% down payment pervade, Lantz says. "Just because you don't have 20% to contribute to a down payment, shouldn't keep you out of the housing market," she says. "I would encourage people to do their research on the options available."
What is an FHA Backed Mortgage?
Borrowers can provide as little as 3.5% of the home's purchase price toward a down payment to be eligible to receive a mortgage loan insured by the Federal Housing Administration.
"Since 1934 the FHA has been here to do two things," says Brian Sullivan from HUD's Office of Public Affairs. "Provide affordable and sustainable mortgage financing for underserved borrowers who otherwise would not qualify and offer an option for first time homebuyers or those who wouldn't typically have access to a conventional loan. The FHA was also a mechanism to help the country recover from the housing crisis."
With the emergence of low down payment programs how can borrowers discern if an FHA or conventional mortgage is the best option? "FHA offers flexibility on credit versus the low down payment conventional loan," explains Bill Banfield, vice president for Quicken Loans. "Borrowers can have lower FICO scores or a derogatory event like a foreclosure and qualify easier for an FHA backed loan."
FHA loans are typically sought for single-family homes, however Sullivan points out condominiums may also be approved. The FHA currently requires that approved condominium developments have a minimum of 50% of the units occupied by owners; however, the FHA is proposing new regulations governing the approval process. Sullivan says with the depression of affordable options, there is a rise of house hunters seeking an affordable option who turned to the condo market. As a result, the FHA proposes to reinstate single-unit approvals in unapproved condominium developments and require condo projects to recertify their approval status every three years rather than the current two-year requirement.
When it comes to applying for an FHA backed mortgage, the process is somewhat similar to what is experienced with a conventional mortgage, including online applications. "Quicken Loans the largest FHA lender in the country," says Banfield. "People like the ease of application through technology, which makes it easier to transact."
It's worth noting that the FHA application process may generally take a little longer than what is experienced with a conventional loan. "The FHA has a lot of underwriting requirements, which slows the process," Lantz advises. "Streamline this process by having your paperwork in order before you apply to reduce wait times. However, borrowers should still be prepared for a little lengthier process."
While many benefits exist for FHA backed loans, Lantz says borrowers should remember those insurance premiums are carried throughout the life of the loan. "If you are able to refinance in the future into a conventional loan, you can drop the insurance and there are no prepayment penalties."