Supported by
The Downside to F.H.A. Loans
Mortgages insured by the Federal Housing Administration are the go-to product for borrowers who don’t have much cash for a down payment. But the required mortgage insurance premiums have become so costly that some critics argue that the agency is taking advantage of borrowers who have few other options.
One of the most vocal critics is Edward J. Pinto, a resident fellow of the American Enterprise Institute, who calls the terms “predatory” and “abusive.” He argues that the majority of F.H.A. loans are at high risk for default should the economy tip back into recession, but that borrowers have no way of knowing how safe their loans are, because the agency prices all loans the same.
Low-risk borrowers, he said, are overcharged to subsidize those at higher risk. “The consumer who has the very-low-risk loan doesn’t even know he might be better off going through the private sector,” Mr. Pinto said. “They may assume that the government is protecting their interests.”
F.H.A.-backed loans cater to first-time buyers because they require as little as 3.5 percent down. Conventional loans backed by Fannie Mae require a minimum of 5 percent down, as well as private mortgage insurance.
The difference in premiums, depending on the loan type, is considerable. Mark Yecies, an owner of SunQuest Funding, offered an example: On a $300,000 loan with 5 percent down, the F.H.A. would charge an upfront insurance premium of 1.74 percent, or $5,250 financed into the loan. The premium would also add $325 a month; if the borrower put down only 3.5 percent, the premium would be $337.50. In contrast, the same loan with 5 percent down and private mortgage insurance would not charge an upfront fee; the monthly premium would be $175.
Mr. Yecies says that if home buyers have decent credit but are short the 5 percent, he often suggests they ask the seller to pay their closing costs as part of their purchase offer. That way, they can bring more money to the table for a down payment. But “less sophisticated” lenders may automatically usher such borrowers into more costly F.H.A. loans, he said.
David Stevens, the president of the Mortgage Bankers Association, agrees that borrowers are better off with a Fannie Mae-backed loan if they can put at least 5 percent down and have a minimum FICO score of 740. And F.H.A.’s market share has in fact dropped as its insurance premiums have risen. But Mr. Stevens, who served as F.H.A. commissioner from 2009 to 2011, says Mr. Pinto’s argument that the F.H.A. is preying on the poor simply doesn’t hold up. He acknowledged that its underwriting standards were too lax during the years after the mortgage market collapse, when lenders shifted their volume to F.H.A. loans, drawing borrowers with the worst credit and ending up with high delinquency rates.
But the agency has since tightened its standards — for example, by setting a minimum FICO score of 580 for those putting 3.5 percent down. Its portfolio quality has greatly improved, as shown in a recent Congressional Budget Office study, Mr. Stevens said. “The data clearly shows that the loans being made today by F.H.A. are the highest-quality loans in its history, with extremely low default rates.”
Dr. Michael Lea of the Corky McMillin Center for Real Estate at San Diego State University says that although he doesn’t view the F.H.A. as predatory, borrowers would benefit if the agency shifted to risk-based pricing. And he likes Mr. Pinto’s call for consumer disclosures comparing insurance costs of F.H.A. and Fannie Mae loans.
“I would like to see a little more tightening of the guidelines,” he said, “even if that means less homeownership support.”
How to Buy a Home
With careful research and determination, the keys to that dream house can be yours.
Start by organizing your finances and asking the right questions: Is homeownership right for you? What are the best markets for first-time buyers? And can you afford to buy a house?
From buying real estate with friends and family to owning a house before finding a spouse, people are exploring creative paths to homeownership that also make financial sense.
For most, the down payment is the primary hurdle keeping them from buying a home, but you may have options.
Are you confused by all the new mortgage gimmicks being offered by lenders? Don’t worry, our guide can help.
Buying a vacant lot offers the chance to build a home on your own terms. Here is what to know if you choose that option.
To those looking to buy property as an investment, a tenant-occupied apartment can be appealing. Weigh the pros and cons carefully.
Bad credit? No savings? There are still ways for you to buy a home.
Advertisement