The Biden administration announced on Feb. 22 that it will help make homeownership more affordable for first-time and low-income buyers who have been pushed out of the housing market by high interest rates and home prices that rose to record highs since the covid pandemic.
Starting in March, the Federal Housing Administration (FHA) will reduce the mortgage insurance premium (MIP) fee it charges borrowers to insure their mortgages by about $800 a year on a typical loan, or 0.3 percentage points.
Black and first-time home buyers are among those hit hardest by the lack of affordable housing, according to a Feb. 22 White House statement. “First-generation homebuyers and first-time homebuyers of color – who are less likely to have sufficient resources for a sizeable down payment due to a longstanding gap in intergenerational wealth transfers – have been particularly affected,” the White House said.
More than 25 peercent of FHA borrowers are homebuyers of color and 80 percent are first-time homebuyers, according to government data. The average home purchased with FHA-insured mortgages costs around half the price of the overall national median home and has an average mortgage amount of less than $270,000.
The FHA insures loans for a higher proportion of Black borrowers than other government-backed mortgage programs, Wall Street Journal reported.
Buyers who don’t have at least 20 percent to put down often turn to FHA government-insured loans.
Overall, nearly one in six home buyers used an FHA-insured loan in December, according to Redfin Corp.
FHA-insured mortgages accounted for 7.5 percent of new home sales in the third quarter of 2022, according to data published by the U.S. Census Bureau. That’s the smallest share since the fourth quarter of 2007, the National Association of Home Builders reported. By contrast, the share of cash purchases has reached a 20-year high of 9.5 percent of sales.
Besides FHA loans, other government backed loans include U.S. Department of Agriculture (USDA) loans, Veteran Administration (VA Loans) and Native American Direct Loans (NADLs).
FHA-insured loans are attractive because they have more lenient credit requirements than conventional loans, low closing costs and competitive interest rates, according to Bankrate.com. However, mortgage lenders require you to pay a federal mortgage insurance premium (MIP), which protects lenders if you default on the loan. The added expense of FHA mortgage insurance is a major drawback to this type of financing.
FHA-insured borrowers must pay two federal mortgage insurance premiums — one up front at closing, and another annually, usually for the life of the loan.
By reducing the mortgage insurance premium, the government would reduce monthly costs by about $70 on a $270,000 loan for people with FHA-insured loans.
The capital reserve ratio for the insurance fund overseen by the FHA is required by law to stay above 2 percent. It stood at 11 percent in November, the agency said. Some industry officials say this is a sign that FHA premium levels are too high.
Even with the new change, the FHA capital ratio is projected to remain above its statutory minimum, WSJ reported.
The FHA has a history of discrimination against Black homebuyers. Established in 1934, the government agency strengthened segregation efforts of the Jim Crow era by refusing to insure mortgages in and near African-American neighborhoods — a policy known as “redlining.”
The FHA also subsidized builders at the time who were mass-producing subdivisions with the requirement that none of the homes were sold to Black people.