FHA Millenial
Real Estate

FHA Loans Plummet in Metro Phoenix, But That May Be A Good Thing for Millennials

(Source: AZCentral): Catherine Reagor – Many real-estate agents, lenders and home sellers are seeing more Millennials purchasing their first house in the Phoenix area.

Why, then, are FHA loans falling?

Government-backed Federal Housing Administration loans, used mainly by first-time buyers, are down 24 percent in the Phoenix area from last year.

Most first-time buyers aren’t paying cash, so they have to be getting other types of mortgages.

 “The drop in FHA loans is puzzling because the signs show there are more first-time buyers in the market,” said metro Phoenix housing analyst Tom Ruff of The Information Market, owned by the Arizona Regional Multiple Listing Service. “I think these buyers are coming up with bigger down payments and opting for other mortgages with better rates and costs.”

That’s a good thing for first-time buyers and the housing market.

FHA not always best deal

Though FHA loans require as little as 3.5 percent down and are easier for borrowers with less-than-stellar credit to get, they can be pricier.

The government-backed loans require homebuyers to pay annual insurance of up to 1 percent of the loan, in case the homeowner stops making payments.

Conventional mortgages from government-owned Fannie Mae and Freddie Mac also require similar private mortgage insurance, known as PMI, if buyers don’t put down 20 percent.

Those loans had required higher down payments since the crash, but both Fannie and Freddie have newer mortgage programs that allow buyers to put down as little as 3 percent

Both FHA and typically the conventional loans with lower down payments include PMI of $100 to $200 a month on a $200,000 mortgage.

But FHA borrowers must also pay an upfront fee of 1.75 percent of the loan. That’s about $3,500 on a $200,000 mortgage, a cost usually rolled into an FHA mortgage.

“First-time homebuyers are becoming more savvy and want to save money,” said Bettina Franco, a Phoenix associate broker with HomeSmart. “Many don’t want to pay mortgage insurance and are finding conventional mortgages that don’t require it.”

That may explain why FHA loans in metro Phoenix have plummeted 30 percent since 2016, while conventional mortgages in the Valley are up 44 percent since then.

Finding affordable loans and homes

The median down payment in the Phoenix area was about $17,000 at the end of 2017, according to ATTOM Data Solutions. That’s up about 20 percent from 2016.

Housing analysts say it’s always a good sign when buyers can afford to put more money down because it shows they have saved more money, prepared better for home ownership and cushioned themselves if prices dip.

Rising Valley home prices have also contributed to higher down payments, but prices didn’t jump 20 percent last year.

Prices are climbing the fastest for metro Phoenix homes priced below $300,000, as first-time buyers compete with investors and flippers for those more affordable houses.

“First-time buyers often have to look at 30 or 40 Valley homes now before finding one they love and get their offer accepted on,” said David Meek of Keller Williams Arizona Realty.

His advice for first-time buyers: “get your finances in order and get approved for a mortgage first.”

And like a growing number of first-time buyers, see if you can qualify for a less expensive conventional loan.

 If not, FHA loans are still a good option, and have helped many — including myself — buy their first home.