Fredericksburg-area home buyers are increasingly turning to mortgages backed by the federal government as conventional bank financing has dried up.
About 35 percent of the 353 homes purchased in the Fredericksburg area in August were financed with loans backed by the Federal Housing Administration, according to data from Metropolitan Regional Information Systems Inc.
That was the highest percentage of FHA-insured loans for any month this decade. It was also the first month since 2000 in which FHA-backed loans were more commonly used for home purchases than conventional mortgages.
That's a trend sweeping the nation as banks grow increasingly conservative about lending practices. Many people are also refinancing their adjustable-rate mortgages into FHA-backed fixed mortgages.
In conventional loans, banks sell the mortgage to Fannie Mae or Freddie Mac, but those institutions are now buying only the safest loans. The only borrowers who qualify for these conventional loans are those who have topnotch credit scores and can make down payments of at least 5 percent and often more.
"If you're a borrower who has little money to put down, then FHA is the only game in town," said Guy Cecala, publisher of trade publication Inside Mortgage Finance.
With FHA-backed loans, the federal government isn't actually lending the money. Rather, it's insuring that the lender will be repaid in event of default.
Borrowers must put down at least 3 percent to qualify for an FHA-backed loan, and that will soon go to 3.5 percent. The FHA charges a 1.5 percent upfront mortgage insurance fee, plus an annual fee of about 0.5 percent, which is paid monthly in the mortgage payment. The FHA is expected to raise its upfront fee to 1.75 percent in the coming months.
That means that homeowners taking out a $250,000 FHA-backed loan would have to pay $4,375 upfront and $104 a month to insure the mortgage. The monthly insurance premiums end after the borrower has paid off a certain percentage of the loan.
In addition, Cecala said, borrowers who get FHA-insured loans must go through a lengthy bureaucratic process that examines their credit history and the condition of the house being purchased.
Very few people bothered with this process during the height of the housing boom because of the widespread availability of low-interest bank loans. Many subprime loans required no money down, no mortgage insurance and less paperwork than an FHA-backed loan.
But now that banks are carefully protecting their capital, those with less-than-perfect credit are finding that FHA-backed loans are the only possibility. Veterans are also increasingly turning to loans backed by the U.S. Department of Veterans Affairs.
The numbers tell the tale both locally and throughout the U.S. Of all mortgage applications accepted in July, according to the Mortgage Bankers Association, 29.1 percent were for government-insured loans consisting mostly of FHA loans. That compared with 8.4 percent in July 2007.
In the Fredericksburg area, conventional financing was used in just 30.9 percent of August home sales. FHA-backed loans accounted for 34.8 percent, and VA-backed loans made up 18.4 percent.
The numbers from August 2005--which was about the peak of the local housing boom--provide a sharp contrast. That month, conventional financing was used for 79.6 percent of home sales, while the combined total for FHA and VA loans was just 3.3 percent.
Cecala said the recent trend has taxed the FHA, which is in need of more resources including staff and computers. Some concern has been raised about its ability to handle the increased loan volume.
Despite these limitations, Cecala said, the FHA is playing a big role in keeping the housing market moving, and will likely continue to do so as long as bank credit is tight.
Bill Freehling: 540/374-5405
Email: bfreehling@freelancestar.com