Shortly after the recession, traditional lending institutions were condemned for their lenient lending practices. In fact, many would go as far as accusing ill-warranted home loans of initiating the downturn. Simply put, too many borrowers were approved for mortgages that they weren’t financially equipped to handle. As a result, banks tightened lending practices and increased requirements. For the time being, it appears to have helped.
The economy has demonstrated a propensity for expansion and the housing market is heading in the right direction. However, in a move to capture more buyers, banks have begun to lower down payment requirements once again. First time homebuyers, in particular, will find the move encouraging, as many borrowers have been neglected for the better part of a decade.
“It’s one of the things that’s inhibiting first-time homebuyers,” said Rob Chrane, president of Down Payment Resource. “There are a lot more people who can qualify for a home that don’t realize that they can.”
In fostering a better environment for first-time buyers, the Federal Housing Administration (FHA) has made moves of their own. Most recently, the FHA cut the amount of mortgage insurance owed on homes with smaller down payments. The plan to reduce mortgage insurance premiums by as much as a half of a percentage point went into effect earlier this year. In fact, once at 1.35%, mortgage insurance premiums are now a modest 0.85 percent.
The move is expected to lower the average homeowners’ annual payments by as much as $900. Perhaps even more importantly, the National Association of Realtors (NAR) believes that the move will directly introduce up to 140,000 new buyers to the market.
Seeing the need to increase Millennial participation within the housing market, government agencies have tried to ease the process of homeownership. In addition to lower insurance premiums, both Fannie Mae and Freddie Mac announced that they have begun backing loans with down payments as low as three percent. The previous minimum was 5%, meaning prospective buyers will not only be able to put less down, but also pay less on mortgage insurance premiums. Of course, the two mortgage giants will require mortgage insurance on those loans with a down payment smaller than 20 percent.
If this wasn’t enough already, first-time buyers will be happy to hear that underwritings are beginning to ease. Of course, this has drawn criticism, as similar actions in the past may be to blame for the recession. However, lending institutions have surely learned from past transgressions. Qualified mortgage loans and more diligent underwritings are already in place.
Recent moves to spur housing activity in first-time buyers may explain the rise in pending home sales. That said, January witnessed the most pending home sales since August 2013. According to the National Association of Realtors (NAR), the pending home sales index increased 1.7% from December to January. The increase placed pending home sales 8.4% higher than it was at the same time last year.
“Contract activity is convincingly up compared to a year ago despite comparable inventory levels,” said the association’s chief economist Lawrence Yun in a release. “The difference this year is the positive factors supporting stronger sales, such as slightly improving credit conditions, more jobs and slower price growth.”
Actual applications, on the other hand, have seen less activity in 2015. Despite historically low interest rates, mortgage applications remain weak. It would appear as if inventory levels and credit standards are still an obstacle for many. Inventory levels, or lack there of, are continuing to drive up prices again.
“The pace will greatly depend on how much upward pressure the impact of low inventory will have on home prices. Appreciation anywhere near double digits isn’t healthy or sustainable in the current economic environment,” admitted Yun.