The Biden administration announced Wednesday a change that will save an estimated 850,000 home buyers — primarily low- and middle-income and first-time buyers — an average of $800 on home financing costs this year.
The move affects mortgage insurance premiums paid by new borrowers who take out loans insured by the Federal Housing Administration. It will reduce the annual premium from 0.85% to 0.55%.
It’s part of an ongoing effort to address housing affordability challenges in the United States. This change, which takes effect on March 20, is expected to expand access to home ownership, said Marcia L. Fudge, Secretary of Housing and Urban Development.
“As we reduce housing costs for people with FHA mortgages, we continue our work to address longstanding disparities in homeownership,” she said Wednesday.
Home financing costs have skyrocketed over the past year, with mortgage rates doubling from a year ago at the same time that home prices have remained strong in many housing markets. This has priced out many would-be home buyers who cannot qualify for a loan.
For homebuyers who have good credit and can make a down payment above 10% of the home’s price, FHA loans tend to be more expensive than conventional loans.
But for homebuyers struggling to enter the housing market, there are some loans like FHA that come with required mortgage insurance. The insurance lowers the risk for the lender to make a loan, so that borrowers can qualify for a loan that they might not otherwise be able to get.
The FHA does not directly issue loans, but rather regulates and insures loans from private lenders that come with advantages for would-be homebuyers with smaller down payments and lower credit scores. FHA loans allow for down payments as low as 3.5% and allow borrowers to have lower credit scores than most conventional loans.
In return, FHA requires borrowers to pay mortgage insurance to protect the lender. This mortgage insurance typically adds to a borrower’s costs. But for borrowers unable to enter the housing market another way, FHA loans can often be the cheapest option.
Outsized impact on new homebuyers and buyers of color
Improving rates on mortgage insurance will have an outsized impact on new homebuyers and homebuyers of color, according to HUD and the White House.
More than 80% of FHA borrowers are first-time homebuyers, and over 25% are homebuyers of color. The average home purchased with FHA-insured mortgages is about half the price of the national median home and has an average mortgage amount of less than $270,000.
According to the administration, by lowering its annual mortgage insurance premium, FHA’s action will help new homebuyers all over the country achieve homeownership, which is currently the principal source of wealth creation for most American households. For example, the average homebuyer in Prince George’s County, Maryland, will save nearly $900 per year, based on the average home price in the county of around $300,000.
In other areas of the country where the median-priced home is lower, the savings will be lower. In Detroit, a home purchased with a $200,000 mortgage will save borrowers $600 per year.
In areas where home prices have shot up, the savings will be greater: For example, a home purchased in Phoenix with a $400,000 mortgage will save the buyer $1,200 per year and a home bought in Austin with a $500,000 mortgage will result in a $1,500 per year saving, according to the administration.
But the action is expected to be of limited impact to the housing market, since rising mortgage rates have increased monthly payments by much more than the mortgage insurance premium savings.
Over the past year, the cost of financing has increased for many borrowers by hundreds of dollars a month.
The typical monthly principal and interest payment on a 30-year, fixed-rate loan for a median-priced $350,300 home in January 2022 with a 10% down payment was $1,425, according to data from Freddie Mac. One year later, a median-priced home cost $359,000 and the same loan had payments of nearly $1,970 a month: a difference of $545 each month.
In addition, only a fraction of all home sales are financed with FHA loans.
Only 811,362 out of 5.7 million purchase loans originated in 2021 were FHA loans, or about 14.3%, according to HUD. In the second quarter of last year, loans through FHA accounted for 15.5% of all purchase loans.
And for borrowers buying new construction homes the share is even smaller. There were only 11,000 sales of newly constructed homes financed through FHA in the third quarter of last year, or 7.5%, according to the US Census Bureau. It was the smallest share since the end of 2007.
Mortgage industry supports the action
The administration’s rate reduction on mortgage insurance premiums is possible because FHA’s mortgage insurance fund has accumulated reserves at a level that is more than five times the required threshold set by Congress, according to the White House.
Home price appreciation and significant refinance volume over the past few years are factors contributing to the surplus and make it possible for HUD to make adjustments and pass savings on to consumers without jeopardizing the long-term sustainability of FHA’s mortgage insurance fund.
The move strikes an appropriate balance between assisting homeowners and ensuring the capital reserve ratio and insurance fund remain strong, according to the National Association of Realtors, which supports the move.
“In this competitive market, new and low- to moderate-income buyers are often left behind,” said Kenny Parcell, the president of the National Association of Realtors. “This reduction will help alleviate some of the financial stress those potential buyers encounter when purchasing a home and allow more people across the country to achieve the American dream of homeownership.”
It’s also something the Mortgage Bankers Association has encouraged for several years.
“The lower premiums will expand homeownership opportunities by lowering mortgage payments for qualified FHA borrowers, providing critical relief from the steep rise in mortgage rates and home prices just in time for the spring buying season,” said Bob Broeksmit, MBA’s president and CEO. “This will especially help minority homebuyers and low-and moderate-income households who are predominantly served by FHA loans.”
He said the Mutual Mortgage Insurance Fund is strong, with low delinquencies and a capital reserve ratio several times above the statutory minimum.
“Ensuring a robust FHA program that protects taxpayers and offers affordable homeownership opportunities for families in underserved communities is important,” he said.