Federal Housing Administration (FHA) mortgage loans were originally introduced so that those with less than 20% down could buy a home. Generally, those with a small down payment are lower-income individuals and families. But now more than ever, high-income borrowers are using the program.
Should FHA set a limit on how much you can make and still use the program?
FHA used by first-time homebuyers
Conventional loans require a minimum down payment of 20 percent to avoid private mortgage insurance. They allow for down payments as low as 5.00 percent these loans require a very good credit score.
FHA loans, on the other hand, allow for a down payment of 3.5 percent with credit score minimums that are much more generous. Each lender sets their own credit score minimum, but some lenders go down to 640 or even 620.
This makes it a popular choice for first-time home buyers. Although FHA can be used by first-timers and repeat homebuyers alike, it is most utilized by those buying their first home.
What’s interesting about FHA is that, though it is geared toward first-time buyers and low- to moderate-income individuals and families, there are no income limitations. So someone making a million dollars per year could, in theory, get an FHA loan.
FHA loans now for the rich?
Over the past few years, the typical FHA home buyer has changed. Yes, most of the home buyers still have low- to moderate-income but that’s not stopping others from utilizing the FHA home loan program.
According to a recent article, about 30% of all FHA mortgage loans are issued to borrowers who make more than 115 percent of the local median income. Is FHA straying from its mission? Should there be income limitations in order to qualify for an FHA loan?
USDA income limits
A loan program that already imposes income limits is the USDA home loan. Those who use this loan can’t make more than 115% of their area’s median income.
You could have an 800 credit score and money in the bank, but if you make too much, you can’t qualify for a USDA loan. Should FHA follow suit?
FHA loan limits are extremely generous
FHA loan maximums can actually vary from one county to the next.
FHA loan limits today are as high as $729,950. Does that seem like a loan for a low income, first-time home buyer?
The FHA program was designed for those with less income who need a boost, so is it really fair to allow high-income earners access to the FHA program? Are these kinds of borrowers putting undue pressure on the program or “stealing” FHA money from those who could really use it?
That sounds logical, but there’s one piece to the puzzle we still need to look at.
Insurance, not a mortgage
FHA doesn’t make mortgage loans. There is no pool of mortgage money that is used to finance home purchases. Mortgage companies make mortgage loans underwritten to FHA guidelines and if the loan ever goes into default and the lender followed the FHA guidelines to the letter, the lender will be compensated by the FHA.
In effect, FHA is an insurance company, insuring loans against default. There is no pool of mortgage funds allocated for borrowers, hence no limit on FHA funds.
But do high-income borrowers default more often?
It could be argued that if these high-income, high-loan amount borrowers were defaulting on their loans, it would put the extra expense on the FHA insurance program, making it more costly for all. However, according to a report, higher loan amounts usually result in lower-than-average default rates.
And, it could be assumed that higher income borrowers have the education and vocational experience to make their payments long term, bolstering the FHA program. So, perhaps an income limit on the FHA program would actually end up making the program less accessible for lower-income families.
What is the FHA mission
Forcing higher-income borrowers into programs requiring more down payment can impede a housing market, quite the opposite of FHA’s mission to spur homeownership. Also, limiting the FHA program in any way may put a stop to the real estate recovery that appears to be occurring.
As long as these high-income borrowers qualify for their higher loan amounts, prohibiting them from using an FHA loan might have negative consequences for FHA, the economy, and the housing market.