February 8, 2017
Millennials and other prospective homeowners thought they’d be saving more than $500 on mortgage insurance in 2017.
That went out when Donald Trump was sworn in.
Now they can swear at our new president, or they can keep their plans alive the old-fashioned way.
Though, gosh darnit, that extra $500 would have helped!
It would have come thanks to a reduction in the interest rate on mortgages backed by the Federal Housing Administration. Trump suspended it in one of his first executive actions.
How FHA Mortgage Insurance Works
Mortgage insurance is required if a buyer puts less than a 20% down payment on a home. The FHA backs 16% of U.S. mortgages. It’s been a dream-saver for millions of buyers who couldn’t get a conventional mortgage approved based on their loan to value ratio.
In late December of 2016, the Obama Administration lowered the premium from 0.85% to 0.60%, effective Jan. 27, 2017. With the median home priced at $234,900, the move would have saved the average buyer $576 a year.
The National Association of Realtors estimates suspending the cut meant 40,000 people had to shelve plans to buy a home. Another 800,000 will have to pay more for mortgage insurance than they would have.
And it’s not as if the housing market couldn’t have used the boost. The Census Bureau reported the homeownership rate fell to 62.9% in the second quarter of 2016, its lowest level in 51 years.
A lot of that is due to Millennials returning to their parents’ basement to live. About one-third of 18-to-34-year olds live with their Mom and/or Dad. For the first time since the 1880s, a greater share of this age group is living with their parents than any other living arrangement.
Back then, people regularly got married in their teens. Since 1990, the median age for a first marriage has increased from 26 to 30 for men and 24 to 28 for women, according to the Census Bureau. Romance may be a partial casualty of Millennial financial worries.
Student debt has tripled in the past 10 years to $1.2 trillion. The Federal Reserve Bank of New York found that student debt accounts for 69% of the debt held by 25- to 30-year-old Americans.
It’s not that Millennials particularly enjoy having Mom bring a bowl of cereal down to their basements every morning. Fannie Mae’s National Housing Survey found that 93% of people ages 25 to 34 plan to buy a house. They just can’t afford one right now.
If they’re not living at home, they’re renting homes or apartments. That’s like being a hamster running on a financial wheel and getting nowhere.
Rental rates have risen steadily the past dozen years, and a study by the real estate website Zillow.com found that homeowners spend 15.3% of their income on monthly housing bills, while renters pay almost double that.
That makes it harder to save money for a down payment on a house, which is where the FHA comes in. It doesn’t issue mortgages, but it provides insurance when buyers can’t come up with a 20% down payment.
The program is especially popular with first-time home buyers since they can make a down payment of as low as 3.5%, even if their credit score is only 580.
The Obama rate cut seemed like a great Christmas present, then Ebenezer Trump snatched it away. At least that’s how critics painted the move.
“One hour after talking about helping working people and ending the cabal in Washington that hurts people, he signs a regulation that makes it more expensive for new homeowners to buy mortgages,” Senate Minority Leader Chuck Schumer said.
The facts are a bit more complicated.
(TRIGGER WARNING: The next few paragraphs attempt to provide context. In doing so, it is possible to deduce that Donald Trump did not intentionally throw first-homeowner down the elevator shaft. If you have been busy marching in protest of all things Trump, you might want to skip them).
The FHA is required by Congress to maintain certain financial levels. It came under severe stress during the financial crisis, and the Obama Administration raised interest rates on mortgage insurance four times.
In 2013, the FHA needed $1.7 billion from the U.S. Treasury due to a wave of defaults. It was its first bailout in 79 years.
That $1.7 billion was money from U.S. taxpayers – a.k.a. You.
Trump’s executive order did not cancel the rate reduction, it suspended it pending further study. Since Uncle Sam is basically co-signing loans, Trump wants to discern if the mortgage-rate reduction puts taxpayers at undue risk.
A 2015 study by Harvard’s Mossavar-Rahmani Center for Business and Government said the FHA’s increasing share of the mortgage-insurance market “does pose a concern that explicit government insurance is enabling lending that could result in high defaults and lower property values.”
To which prospective homebuyers say, “Harvard, Schmarvard! I need a loan and now it’ll be harder for me to get one!”
How To Qualify for an FHA Mortgage
The same elements are still in play. Lenders look for buyers with stable incomes and good credit ratings. Everybody knows that. What buyers don’t realize is the importance of their debt-to-income ratio.
Basically, it compares your housing expenses and other debt obligations to how much you earn per month. Say you make $6,000 a month and pay $2,000 a month for your mortgage, $500 a month for a car loan and another $500 for the rest of your debts.
Your total expenses are $3,000, which is 50% of your income. So your debt-to-income ratio is 50%, and lenders are likely to offer you a parting handshake and quickly show you the door.
A 43% debt-to-income ratio is generally the maximum you can have and still qualify for a loan. So, how do you get there?
The simple answer is make more and spend less, though every consumer knows it’s not that simple. It requires learning how to budget, belt-tightening and dedication. A little outside expertise can also help, especially with expenses that are not fixed.
Yes, that $500 break is a setback for a lot of American dreamers. But if they get their financial houses in order, there is no reason they can’t buy a real one.
(Lane, A.)(ND). Beyond the Headlines: Is Student Debt Strangling Millennials’ Chances for Success? Retrieved from http://www.bentley.edu/impact/articles/beyond-headlines-student-debt-strangling-millennials-chances-success
(Fry, R.)(2016, May 24). For First Time in Modern Era, Living With Parents Edges Out Other Living Arrangements for 18- to 34-Year-Olds. Retrieved from http://www.pewsocialtrends.org/2016/05/24/for-first-time-in-modern-era-living-with-parents-edges-out-other-living-arrangements-for-18-to-34-year-olds/
(Lux, M., Greene, R.)(2015, June 15). What’s Behind the Non-Bank Mortgage Boom? Retrieved from https://www.hks.harvard.edu/content/download/76449/1714947/version/1/file/Final_Nonbank_Boom_Lux_Greene.pdf
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(Worstall, T.)(2017, Jan. 21). Trump Admin’s First Action – Suspend The FHA Insurance Rate Cut. Retrieved from http://themortgagereports.com/17092/fha-mortgage-insurance-premiums-mip-change-2015