It has long been conventional wisdom that FHA (Federal Housing Administration) mortgages are the best bet for first-time homebuyers, but 2020 may have changed that. Despite generally lower credit standards and attractively low down payments, more than half of all first-time buyers in 2020 opted to use conventional (read: non-FHA) financing for their home purchase. By comparison, first-time buyers obtaining FHA-insured financing in 2020 registered at only 29 percent. This could indicate a long-term shift in buyer mindset about financing in general and, over time, the potential for homebuyers to permanently alter their views on mortgage financing.
What Makes FHA Loans So Attractive?
FHA loans have traditionally been considered the first-time buyer’s best friend because they require lower down payments (as low as 3.5 percent in many cases) and tend to have more relaxed credit requirements than other mortgages. Since first-time buyers often have difficulty building up a down payment, which might be between 5 and 20 percent with other lenders, and tend to not have the same credit history as established home buyers, FHA mortgages have often made homeownership possible when it would otherwise have been out of reach.
However, in today’s lending market, conventional lenders have begun originating mortgages with only 3 percent down. For reference, that would mean that a buyer borrowing to purchase a $200,000 property would need just $6,000 for a down payment (compared to $10,000 for a 5 percent down payment). Additionally, the requirements on FHA loans often require borrowers to hold private mortgage insurance (PMI) for the life of the loan rather than being automatically terminated when the equity in the home reaches 78 percent. This can cause FHA loans to cost more than $15,000 more over the life of the loan than conventional, non-FHA mortgages.
Borrowers’ Perspectives are Changing
While it is intriguing to watch an increasing number of borrowers evaluate the benefits of FHA loans and, ultimately, opt to borrow elsewhere, the real lesson in all of this is that many of the traditional concepts that buyers have held about leverage and home loans are changing. With these changes will come a more receptive attitude for creative financing – both when buying and selling. This could open up an entirely new population of buyers and sellers willing to consider working with private lenders and offering creative financing to buyers. This opens up a number of potential opportunities for real estate investors already thinking creatively to work with new populations in the near future.