What Biden’s FHA mortgage fee cut means for buyers

First-time homebuyers already feeling the pinch of inflation could catch a break after a recent action that will trim mortgage insurance premiums on federally backed loans. 

Loans secured with the backing of the Federal Housing Administration (FHA) typically enable buyers who are otherwise unable to afford a home to compete in the market without putting up a hefty down payment of at least 20 percent. 

“A lower mortgage insurance premium on FHA loans is good news for buyers, especially those buying their first homes and with less-than-perfect credit,” Zillow Senior Economist Nicole Bachaud told The Hill.  

“As most mortgage buyers put down less than 20 percent, mortgage insurance is typically an expensive addition to their monthly payments that can stick around for years,” she added. 

FHA mortgages made up 7.5 percent of homes purchased in the third quarter of 2022, the White House said, and 80 percent of this swath of buyers consisted of first-time homeowners. About a quarter are buyers of color. 

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The Biden administration’s plan would reduce the annual mortgage insurance premium on FHA loans by 0.30 percentage points, from 0.85 percent to 0.55 percent and will take effect March 20. 

And with the cut, the White House expects close to 850,000 buyers and new homeowners will save an average of $800 annually. 

This potential savings could open housing availability in a market where high mortgage rates and persistently high home purchase prices keep buyers on the sidelines. 

Mortgage rates are still spooking potential buyers

Mortgage rates are creeping up after a brief cooling period, hitting 6.50 percent last week, according to Freddie Mac data. And although home price growth has slowed significantly from the pandemic era highs last summer, the median priced home sits at $359,000. 

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“Affordability, or the lack of, in many cases, is driving the market right now. There’s no shortage of people who would like to buy their first home, but many have simply been priced out after huge home value gains and a sharp rise in mortgage rates,” Bachaud added. 

What are the downsides to using an FHA loan?

But buyers who secure an FHA loan are locked into the mortgage insurance premium for the life of the loan, which may not be in the buyer’s best interest, Tom Catlin, a realtor with Keller Williams Realty Georgetown in Georgetown, Texas, told The Hill in an interview.  

“If they can avoid using an FHA loan, it’s probably in their best interest because in other loans the mortgage insurance will be less, or it will go away,” Catlin said.   

“But if they don’t have another choice, whether it’s because it’s not an USDA eligible area, for example, or they just don’t have the right credit or debt to income ratio or less than 20% down on a conventional kind of thing, then it’s still a great option,” he added. 

Catlin added that even amid high rents and home prices, if the monthly cost of a home compares at all to what a prospective buyer is paying already, they should give homeownership a shot. 

“If you’re going to be paying something that’s even close to what the rents are, and there’s a tax benefit for it, and you could paint a wall or make a hole or make noise in your own house without disturbing somebody else that shares a common wall, then it’s absolutely worth it.” 

“It’s still a smart idea and it’s part of the American dream,” he said. 

Lower insurance premiums could mean more first-time buyers can own a home

Jason Sharon, a mortgage broker and owner of Home Loans Inc. based in South Carolina, told The Hill that the upcoming cut to insurance premiums could potentially give buyers a real boost. 

For a $350,000 loan, the current mortgage insurance would run close to $248 monthly, Sharon explained. The change in premiums would cut the monthly premium payment to about $160. 

“If you extrapolate that $87 [per] month difference into real buying power, a person could qualify for about $10,000 to $15,000 more home following this change with the same monthly payment,” he said. 

But Sharon said the federal government could have cut the rate even more. 

“While this change is a step in the right direction, it could have gone farther. According to the 2022 FHA Annual Report to Congress, the FHA Mortgage Insurance reserves stand at about 11%, significantly more than the federally mandated amount of 2%,” Sharon said. 

“This grew from 6% in reserves in 2020. So, through the forbearance and covid issues, the reserves increased. Why not reduce the mortgage insurance even more,” he said. 

Move to curb FHA mortgage fees has plenty of backers

Still, the administration’s move was welcomed by housing advocates who say market conditions are pushing homeownership out of reach for many.  

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“At a time when rapidly rising rents are making it nearly impossible to save for a downpayment and sky-high home prices and higher interest rates are creating yet another hurdle on the journey to homeownership, we welcome this reduction in the FHA’s MIP,” Nikitra Bailey, vice president of the National Fair Housing Alliance said in a press statement. 

“Not only will this decrease place homeownership in range for more everyday individuals, it will help spur economic growth in communities throughout the country,” she added.