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Rising house prices, tight supply and increased demand put enormous pressure on buyers. But some people are hit harder than others in this market, making home ownership impossible.
People entering the housing market for the first time, particularly those using government-backed mortgages and who tend to be minorities, have had the most difficulty accessing homeownership over the past two years. . The number of entry-level buyers fell to 27% in January from 33% the previous year, according to the National Association of Realtors (NAR).
A big part of the problem is that housing supply is rapidly shrinking, especially affordable housing. Total housing stock fell to its lowest level on record in January, with roughly 860,000 properties for sale on the market, according to NAR. And as the number of affordable homes for sale dwindles, the homes left on the market are much more expensive. The average mortgage size hit a record high of $451,000, according to the Mortgage Bankers Association (MBA).
Even real estate agents making huge financial gains see this market as “unhealthy and very difficult”, says Andy Alloway, owner of Omaha-based Nebraska Realty.
“We’re facing a housing crisis, supply chain issues to two decades of underbuilding,” Alloway says. “Investors are coming in and seeing a great opportunity to buy single-family homes because rent is going up at the same rate as buying a house. All of that is costing a lot of homeowner buyers.
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Buyers struggle to get financing
Most homebuyers, especially first-time buyers, rely on mortgages to buy homes. But even if they qualify in today’s higher-priced housing market, borrowers face insurmountable competition as more cash buyers enter the market.
This time is especially difficult for borrowers seeking government-backed loans, such as Federal Housing Administration (FHA) or Veterans Affairs (VA) mortgages, who may have more stringent requirements for the house being sold, its price and valuation.
The number of applications for government-backed loans fell 8.8% for the week ending March 4 compared to the same period last year, according to the MBA. Overall, mortgage applications have fallen as interest rates have risen this year, but conventional loans have fallen less, by 7% over the same period. Part of the steeper decline in FHA and VA applications is due to the rising cost of homes, which is preventing more borrowers from getting a loan.
“FHA loans are down year over year because home prices are rising in the double digit range,” says Joel Kan, associate vice president of economic and industry forecasting at MBA. “Higher home prices make it harder for FHA borrowers, who typically have less than stellar credit, to qualify for these high loan balances.”
In St. Petersburg, Florida, where homes are snapping up at a median rate of 17 days faster than the rest of the United States, the city has increased its down payment assistance for first-time buyers from $40,000 to $60,000, based on certain qualifications as income.
But even with extra help, Aaron Hunt, a broker with Avalon Group Real Estate in St. Petersburg, says he doubts the extra cash injection will help these folks win the house over cash buyers. Part of the problem is that home sellers tend to favor cash buyers, and those with FHA or VA financing have the stigma that they are higher risk.
“A lot of cash buyers come into play, so if anybody comes in with any kind of financing, they’re at the bottom of the totem pole,” Hunt said. “And it’s nearly impossible for people with down payment assistance or even FHA pre-approval to get an offer accepted.”
The housing crisis affects minority borrowers the most
The second largest group to make FHA loans, next to those who identify as white borrowers, were black and African American borrowers, totaling $82 billion in FHA financing in 2020, according to the latest data from Home. Mortgage Disclosure Act (HMDA). But black potential buyers have been hardest hit by the latest spike in house prices and the supply drought.
Black homeownership fell to 43.4% in 2020, even lower than a decade ago, when it hit 44.2% in 2010, according to a recent NAR report. While homeowners identifying as white (72.1%), Asian American (61.7%) and Hispanic (51.1%) all hit decade highs in homeownership in 2020.
“As the gap between homeownership rates for black and white Americans has widened, it’s important to understand the unique challenges faced by minority homebuyers,” said Jessica Lautz, vice -Chair of NAR Demographics and Behavioral Information, in the statement. “Housing affordability and low inventory have made it even more difficult for all buyers to access homeownership, but even more so for black Americans.”
With the financial hardship facing many potential black home buyers, the need for viable mortgage options is greater than ever, says Tai Christensen, director of government affairs at CBC’s Mortgage Agency. FHA loans are attractive because they have a low down payment requirement of 3.5% of the purchase price.
“Black borrowers are referred to the FHA because of wealth gaps,” says Christensen. “They can’t come with a 10% to 20% down payment” as typically required for a conventional loan.
According to a recent NAR survey, which garnered responses from over 3,530 NAR members, 66% of home sellers were “definitely” likely to accept an offer from buyers with a conventional mortgage, compared to just 13% who were “definitely” likely to accept an offer from buyers with a conventional mortgage, compared to just 13% who were certainly “likely” to accept an offer from FHA borrowers.
“The fact that people don’t want to take out FHA loans is quite concerning,” says Laurie Goodman, founder of the Urban Institute’s Housing Finance Policy Center. “FHA loans have traditionally served first-time home buyers as well as black and Hispanic borrowers. This has obviously been very important for the first time homebuyer market.
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How FHA Changes Can Help More Homebuyers
Experts say there are a number of ways to close the growing gaps in homeownership. For starters, the federal government can also play a role in making FHA loans more attractive to sellers by making FHA loans more efficient and reducing some of the hurdles applicants must jump through to qualify, Goodman says.
For example, observers and reports cite the FHA’s strict appraisal requirements, which require FHA-certified appraisers, as a barrier to homeownership.
“Homes are selling above appraised value, making it impossible to get FHA loans,” Goodman says. “There has to be a way to make these loans more flexible without incurring more risk.”
Goodman also suggests getting rid of the home inspection, a redundancy because the appraisal alone should identify problems and reflect the value of the home. Others, like Christensen, added that the FHA should consider using more alternative data — like rental and utility payments — to assess an applicant’s creditworthiness, which would help qualify more black applicants. specifically.
The U.S. Department of Housing and Urban Development (HUD) and FHA are looking top-down at ways to adjust and remove barriers to homeownership, especially for communities of color,” says Lopa Kolluri , Principal Deputy Assistant Secretary at the FHA.
To make FHA loans more viable, the FHA relaxed the way student debt is calculated in the approval process last June. So far, the move has helped bolster eligibility for many borrowers struggling with student debt, Kolluri said. The FHA is also exploring ways to modify the mortgage insurance premium (MIP) to incentivize borrowers and streamline the application process, she says.
How FHA Borrowers Can Increase Their Chances of Winning a Home
Competition is incredibly fierce for those who need government-backed financing to secure a home, but there are some tactics FHA borrowers can use to give them an edge.
To get started, do extensive research online and in person to find the right realtor as well as lender. These two people will be the most knowledgeable to give you the best options for obtaining financing and earning a home.
For example, many FHA borrowers have strong credit ratings and can make higher down payments, which is information lenders should share (if the borrower consents) to improve the buyer profile. Look for lenders with a good reputation in the community, as an FHA pre-approval from a reputable lender may go further than a pre-approval from a lender the seller is unfamiliar with.
“With the buyer’s permission, a lender can reveal financial information such as credit score and work history,” says Kristy Miley, founder of Red Bird Realty Group at Coldwell Banker Shook in West Lafayette, Indiana. “Ask the lender to contact the seller directly about your creditworthiness. Do what you can to stand out from the crowd.
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