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Uptick in FHA Loans Is an Encouraging Sign for FirstTime Homebuyers

An uptick in FHA purchase loans is a welcome sign for first-time homebuyers trying to break into a competitive housing market. Here's why.

August 16, 2022
August 16, 2022
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For first-time homebuyers struggling to find a foothold in the competitive housing market, there is a glimmer of hope in the recent uptick in applications for FHA and other government loans.

FHA loan applications jumped 3.3 percent last week, according to the Mortgage Banker Association’s (MBA) Weekly Mortgage Applications Survey.

The jump coincided with an overall increase in mortgage activity driven by interest rates reaching a 5-month low. Purchase applications increased for the first time in nearly a month, while refinance applications rose to the highest level since February 2021.

Why an uptick in FHA loans is an encouraging sign

Insured by the Federal Housing Administration (FHA), these loans are specifically geared toward homebuyers with low-to-average credit and limited savings for a down payment. They are particularly popular with first-time homebuyers, who accounted for more than 83% of FHA purchase loans in 2020.

However, some sellers are wary of FHA offers. These loans come with more thorough property requirements and take on average 5 days longer to close than conventional loans. There are also misconceptions about FHA loans “falling through” during the underwriting process, even though they historically have a similar closing rate as conventional loans.

Between minor inconveniences and misconceptions, it can be tough for FHA -- and other government offers like VA and USDA -- offers to compete against conventional and all-cash offers.

In a year dominated by bidding wars, this has led to a longer, more frustrating home searches for qualified buyers using government loan programs.

But an uptick in FHA loan applications suggests that more of the buyers are finding a foothold in the market. Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting said the following:

“With low for-sale inventory keeping home-price appreciation in many markets at record highs, the jump in FHA purchase applications is potentially a sign that more first-time buyers are finding purchase options despite the high prices."

A developing trend

Before the pandemic, FHA loans accounted for 20% or more of all closed purchase and refinance loans. In early 2020, the share of FHA loans dropped substantially and have been hovering around 10% since.

Meanwhile, conventional loans -- which accounted for just 63% of all closed loans in early 2017 -- increased their share during 2020. By February 2021, conventional loans made up 84% of all closed loans while FHA accounted for 8%.

Since the February peak, the trend has reversed. FHA and VA loans have increased their share of mortgage activity while conventional has lost some steam.

Some of this is due to refinance activity. But the MBA survey proves that FHA purchase activity is increasing.

And that should be a welcome sign to first-time homebuyers looking to break into the market.

Fairway is not affiliated with any government agencies. These materials are not from the VA, HUD, FHA, USDA, or RD, and were not approved by a government agency.

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