One reason that the housing market has been slow to recover is lenders are very stingy with their money. They have become ultra conservative in their lending practices. As a result, getting a home loan is tough, especially for new or low-income buyers.
But things might loosen up a little.
Thanks to proposed Federal Housing Administration (FHA) fee reductions, potential home buyers will be paying less for their loan. The fees, which are added to the monthly payment amount as mortgage insurance, will go down from 1.35% to .85% according to a proposal by President Obama.
The president also asked the agency to find ways to make it easier for borrowers to qualify for FHA loans. FHA loans are typically where new and low-income buyers go to get that first loan at a reasonable rate. During the housing crisis FHA-backed loans became the only mortgages available to many of those buyers, given their tiny down-payment requirements and easier credit-score hurdles. However, FHA borrowers had to pay mortgage insurance as a result.
Now of course, this problem is being caused by stingy lenders who’s only concern is covering their butts by demanding unusually high credit scores and large down payments. The credit scores they often require are higher than even the government’s own criteria.
It all seems rather short-sighted for the banks. They could be developing new customers and growing the economy. Wouldn’t more homeowners come back to them as more successful customers and they would put more money in circulation in general.
Now the real estate industry, minus the banks, have been encouraging just this kind of thing for awhile now. The National Association of Realtors, and even the Mortgage Bankers Association, feel that lowering these fees will bring in new home buyers that had been shut out by the high cost of buying a home these days. Even with record low mortgage rates, the first-time buyer often can’t afford the payments.
What does all this mean in real money?
A borrower who wanted a $200,000 loan paid an annual premium of $91.66 per month back in 2009. With the current fee rates they would pay $225 per month, which is a 145% increase. After the fee reduction takes place their monthly fee would be reduced by $83. Not a lot but maybe enough to help the reals estate market.
So why did the FHA raise it’s fees in the first place?
During the housing crash the FHA, which guarantees loans, took a big financial hit. Their cash reserves fell so low they needed to raise fees to cover costs and build up their reserves which are used to cover defaulted loans. They also had to turn to taxpayers for help and took out $1.7 billion from the treasury.
Now that the housing market is more stable, they can begin lowering those fees and that’s just what President Obama is proposing.
The White House estimates that the lower premiums will enable up to 250,000 new buyers to purchase a home. Now that sounds like something we can all get behind.