Danny Salas

In news that should come as no surprise to anyone, the Mortgage Bankers Association is reporting that in June government-insured loans – meaning FHA and VA financing, but mostly FHA loans – represented 36 percent of all loan applications, the largest market penetration since 1990.

In comparison, the lowest recorded market share was 5.8 percent in August 2005.

“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, MBA’s Associate Vice President of Economic Forecasting. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

Applications Up

The government-insured (FHA and VA loans) share of mortgage applications was 35.9 percent in June 2009, the highest level since November 1990, according to the Mortgage Bankers Association.

Based on data from MBA’s Weekly Mortgage Applications Survey, the government-insured share jumped from 25.7 percent a month earlier and 27.0 percent in June 2008. Since the MBA survey’s inception in January 1990, the lowest recorded share was 5.8 percent in August 2005.

The government-insured share of purchase applications in June was 38.6 percent, up from 27.8 percent one year ago. The government-insured share of purchase applications has averaged 36.6 percent to date in 2009, compared to an average of 21.8 percent during the same period in 2008. The low point was in August 2005 when it was 6.8 percent.

“A primary reason government-insured loans have retained a high share of the purchase market is that these loans typically require lower down payments than conventional loans,” said Orawin Velz, MBA’s Associate Vice President of Economic Forecasting. “In addition, lending standards tend to be tighter for conventional loans, especially for loans that require private mortgage insurance.”

“While the government-insured share of purchase applications has remained elevated, the government-insured share of refinance applications has been volatile. The share hit a record high of 38.4 percent in October 2008. As mortgage rates fell sharply between mid-November through early May, refinance activity surged for conventional loans. This surge in conventional refinance applications dominated the market, causing the share of FHA refinance applications to fall below 20 percent for most of this year. Recent increases in mortgage rates have caused conventional refinance activity to drop much more sharply than government-insured refinance activity due to a combination of credit and LTV requirements. As a result, the government-insured share of refinance applications climbed to 33.6 percent in June,” Velz said.

FHA vs. Convnentional:  Realtors you make the call!

Many banks have tightened up standards on their mortgage loans in the current lending enviorment.   We are seeing a record number of homebuyers coming to us that sought us out because their bank turned them down and did not offer FHA financing options.

Did you know that an FHA loan can be obtained with a credit score as low as 620?  Many banks are not lending borrowers with a credit score under 680 and some even require a 740 credit score, certainly for the best terms.  FHA offers great rates with reduced monthly mortgage insurance, more liberal debt to income allowance, only a 3.50% down payment requirement and up to a 6.0% seller contribution toward your buyers closing costs.

This is why we are confident that FHA is the way to go if your buyer is putting down less than 20%, even if they have excellent credit score.   Today, many banks are not offering conventional loans with private mortgage insurance for borrowers under 740 with less than 20% available for the down payment.  This makes FHA Insured loans loans the only alternative for a homebuyer to obtain financing.

Below is a comparison of FHA and Conventional financing requirements for a $300,000 sale price on a single family residence in Butte County, California.