FHA Financing May Be On Its Way Out

By Kyle Chezum Updated on 3/7/2011

It's common knowledge that many homes purchased and refinanced during the past two years have been financed through the Federal Housing Administration.  At present, the FHA is responsible for the lion's share of mortgage loans closed in the nation.  In 2009, 56% of all mortgages were financed through the FHA.  This is a dramatic increase from 2007, when just 6% of loans were financed through the FHA.

Economists credit the FHA with providing a major role in keeping the home purchase and refinance industries afloat during the recession.  Without the low financing costs and standards enjoyed by FHA borrowers, the housing sector may have sunk even further.  But all good things must come to an end, it seems.  Rumors are spreading that the government may make FHA financing more difficult and costly to obtain in the coming years in order to guide more of the mortgage market back to conventional banks.

Guy Cecala, publisher of Inside Mortgage Finance, suggests that the minimum down payment requirement for FHA mortgages will soon increase.  "A lot of people think it's just a matter of time before they increase the down payment from 3.5% to 5%," he says.  "It's tough for the government to be saying, 'We want to help underwater borrowers; we think there should be principal forgiveness.'  At the same time, they are creating a whole new wave of underwater borrowers by offering 3.5% [financing]."  Home prices are unstable at present, and even a minor dip could sink buyers with no more than 3.5% equity in their homes.

FHA loan limits are set to decrease soon, too.  By October, the maximum amount that can be borrowed with FHA financing will likely decrease across the board, narrowing the range of homes that can be purchased.  These limits were increased during the height of the financial crisis to aid the marketplace.  But the FHA's mission has always been to assist low income homebuyers.  Buyers taking on loans of close to $730,000 most likely don't fit this description.  Current high-cost FHA loan limits rest around $729,750, but this amount varies from region to region.

FHA financing fees and private mortgage insurance expenses will likely increase in the near future, too.  Many economists and lawmakers see these steps as beneficial and necessary, an important part of getting capital back into the private market.  But if the government acts too soon, the floundering housing sector may simply lose another source of financing and end up further crippled.