The Rise and Fall of FHA Financing - the dilemma for first time buyers
REALTOR® Outlook
By Kay Wilson-Bolton
Columnist
Published: June 26, 2009
By Kay Wilson-Bolton
Just at the time there was opportunity for a new group of homebuyers to purchase a home with FHA financing, the housing inventory sharply reduced, interest rates increased and sellers everywhere opted to work with buyers using conventional loans instead.
This has put a new strain on the real estate market. However, prices are beginning to stabilize, and this is good news for owners who need to sell sooner than later. Today’s price is a stronger price than it was last month and may be stronger still in the months to come.
A reduced inventory and the 90-day moratorium on foreclosures has shortened supply. REO’s have been a particular category of homes which comprised the majority of the housing inventory in Ventura County. The sales rush was caused partly by the use of the FHA loan which allowed more buyers to enter the marketplace and compete for homes.
FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. It is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration, issued by federally qualified lenders.
The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers.
Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI.
The other aspect of an FHA loan is that only 3.5% down payment is required and, by the nature of the borrower, their funds are limited
FHA jumped in popularity in the late 1970’s and early 1980’s, and it became common practice for sellers to pay for buyers closing costs or point to buy down interest rates. This was a time when interest rates had gone past 15% and sellers would do about anything to facilitate a sale.
In the market of recent months, REO sellers were delighted to move inventory off the books by accepting FHA/VA offers and pay up to 3% closing costs. There was an additional program that provided 3% down payment gift to buyers to use as their down payment.
In this new market, asset managers are rejecting FHA and VA offers and considering first offers with conventional financing. They are also reluctant to pay 3% for buyers closing costs. Even cash offers at less than asking price are being considered over FHA offers over asking price.
FHA buyers are watching the inventory disappear with little hope of buying a home in good condition any time soon. _Sadly, the remaining unsold homes need a fair amount of work and will not qualify for FHA loans anyway as there is a minimum standard for habitability and qualification.
It is tempting to analyze the forces and consequences of all of this to create business plans to fit. However, it seems easier to accept that fact we are caught in a tidal wave of change and if we hang ten, we can ride it till we all hit shore.
Kay Wilson-Bolton is the owner of CENTURY 21 Buena Vista. She is an REO specialist and brings a regional perspective to local issues and can be reached at 805.340.5025. Her website is www.readysetkay.com
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