The Federal Housing Administration’s recent decision to reduce private mortgage insurance may be having its desired effect: encouraging millennials to get off the fence and make a home purchase.
FHA loans have long been an option for interested homebuyers who do not have a large down payment or a less-than-ideal credit rating. Yet, while FHA loans help to lower the down payment requirements, they are typically associated with higher monthly payments due to the addition of private mortgage insurance, or PMI. Earlier this year, the FHA reduced the PMI requirements on its loans, effectively bringing the cost down by $900 per year as of January 26th. According to recent data, it appears as if reducing the PMI cost has helped to spark more interest in purchasing a home.
Recent data indicates that FHA loans have seen an increase in activity. While FHA loans accounted for 19 percent of mortgage loans during the second quarter of 2014, this figure increased to 23 percent during the second quarter of 2015. Many experts in the industry have noticed that the new FHA guidelines seem to have helped encourage millennial first-time buyers to make a purchase. The same is true with other low down-payment borrowers and even former homeowners who are interested in purchasing a house once again. In fact, some lenders are seeing their FHA loan volume increase by more than 20 percent during the first half of 2015 when compared to the same time period last year. Overall, the National Association of Realtors reports that home sales were up 3.2 percent in June when compared to May. Furthermore, sales are currently on track to reach nearly 5.5 million homes sold during the year. This represents a 10 percent increase when compared to last year and would be the best performance the market has seen since 2006. Sale prices are also on the rise with median existing home sales reaching $236,400 in June. These figures are greater than the peak median sales price of $230,400 that was reached in July 2006. Interestingly, while FHA loans make it possible to purchase a home with a lower down payment, many lenders are finding that down payments are getting bigger even on FHA loans. This may be due to the fact that buyers are saving money on PMI and using those savings to help make a larger down payment.
Given the data being reported by the Mortgage Bankers Association, it appears as though the U.S. mortgage market is finally recovering from the crash of 2009. Not only is credit expanding, but cash sales have fallen to their lowest level since December 2009. As a result, the Mortgage Bankers Association has increased its estimate for mortgage originations by $71 billion to $801 billion for 2015. For 2016, the association has increased its estimate by $94 billion to $885 billion. The trend is expected to continue beyond 2016 as more sales are financed and applications are approved.
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