Warning Signs from the FHA
As we have stated on many occasions, the irony of the housing world is never more apparent than when the economy and the housing markets struggle. It's ironic because it seems the people who need the most protection and guidance for ownership who seem to suffer worse as housing markets become more turbulent and inflation continues to jeopardize the economy.
A case in point that's currently in the making are FHA mortgages, which are beginning to show signs of increasing short-term loan delinquency after rebounding somewhat from pandemic era levels. These are mortgage loans underwritten and backed by the Federal Housing Administration (FHA) and while they've been available to anyone for decades now, they tend to be most prevalent for those with imperfect or damaged credit, those who also seek higher LTV loans (as modest a down-payment as possible) with the most typical down-payment coming in at 3.5%. In addition, while not specifically earmarked for first-time buyers, FHA data tells us that they represent about 80% of the FHA's purchase volume. These loan types have also been heavily favored by folks who have lower median income levels than other conventional Buyers. As example, according to the Home Mortgage Disclosure Act (HMDA) the median income in 2021 for FHA Buyers came in at about $65,000 compared to $105,000 for their conventional Buying counterparts.
As a result of inflation, it is being reported by Black Knight that over 25% FHA Buyers who closed in the first nine months of 2022 have dropped into negative equity territory, and nearly the other three quarters have less than 10% equity in their properties. As inflation continues, unemployment is expected to rise further, the writing on the wall is less and less favorable going forward for those Buyers. Fortunately for the FHA and taxpayers, the mutual mortgage insurance fund (MMI Fund) has a capital reserve ratio of 11.11%, which represents an increase of 3% from 2021. While FHA mortgages may be "cheap" in terms of down-payment requirements, just ask the typical FHA borrower how "cheap" the mortgage insurance is on their loan! Spoiler Alert: It's expensive as heck, and unless a Buyer puts down 10% or more that insurance premium remains for the LIFE of the FHA loan!
If you're
considering using an FHA mortgage, make SURE that you cover all of the pros and cons
with your Lender and your Realtor®, because these loans are a Godsend when
absolutely needed, but can be an albatross if not needed. Using our
platform at PropertyGuerilla.com these are questions you can ask with 100%
anonymity before you commit to anything.