It’s Now Easier for Lower-Income Buyers to Get a Mortgage
President Obama’s recent announcement about national home loan policy could save you money.
A good sign — and perhaps a good omen — for homebuyers as the spring hunt ramps up: the government insurer of home loans will be lowering its rate, making it easier for new or middle-income buyers to own a home.
The White House announced yesterday that the Federal Housing Administration will lower its annual insurance premiums from 1.35 percent to 0.85 percent of the total loan amount. The FHA protects lenders against loss if borrowers are not able to pay back the mortgage, encouraging lenders to make loans to borrowers who might otherwise be seen as too risky. Borrowers pay for the insurance.
The FHA — a common source for first-time homebuyers, those with middle-of-the-line credit scores, or those who can’t afford to pay a large down payment — has braved a tumultuous few years. High loan volume coupled with high default rates has forced the agency to increase its premiums five times since 2010. In 2013, it had to turn to a taxpayer-funded bailout for the first time.
Wednesday’s announcement is big news for homebuyers who don’t have perfect credit. The White House predicts that a typical first-time homebuyer would save $900 in their annual mortgage payments as a result of this cut and that more than 800,000 FHA borrowers will take advantage of the lower rates.
“There’s this perception that only buyers with pristine credit can buy houses. That’s just not true, precisely because of the FHA,’’ said Paul Willen, senior economist at the Federal Reserve Bank of Boston.
A 0.5 percentage point drop is a significant amount, Willen said. He added that existing homeowners might especially benefit from this — many borrowers will want to refinance their loans through the FHA. However, Willen warned it’s possible the cost, time and effort it take to refinance could offset the reduction in the insurance premium rate.
As with anything President Obama does or says, the announcement doesn’t come without its critics. Rep. Jeb Hensarling (R-Tex.) said in a statement, “If President Obama follows through on [the] pledge, he will be increasing the likelihood that taxpayers will have to foot the bill for yet another bailout.’’
The rate reduction is part of a larger administrative push to “cut red tape’’ for families trying to obtain mortgages and a home.
Skylar Olsen, a senior economist at Zillow, notes that these initiatives don’t address access to rental housing, which is critical to the homebuying process. “Today’s renters are tomorrow’s homebuyers,’’ she said.
“When we think about what is the potential for a family to own a home, we first have to think about how expensive it is to rent, which determines how a family is able to save,’’ she said.
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