A new report from CoreLogic reveals that “purchase-plus” loans to Federal Housing Administration borrowers hit a new high in June of this year.
While home purchases tied to FHA loans have historically tended to be higher for those with FHA loans, they have risen significantly in recent years.
The reason is likely rising home prices, which have made it increasingly difficult to save money for a down payment, even if you only need 3.5%.
To clarify, an additional loan is a second mortgage that is taken out in conjunction with the first mortgage to expand the total amount of financing.
For example, a first mortgage might be for 96.5% of the purchase price and a second mortgage for the remaining 3.5%.
While this is helpful for homebuyers who have little money set aside for a down payment and closing costs, it can present problems if they try to refinance or sell.
FHA Piggyback Share of Home Loans Increased to 18%
From June 2022 to June 2024, the FHA purchase loan share increased from 10.8% to 18%, per Corelogic.
This is double the 9.8% share seen in 2017 when the housing market appeared to be in a recession. natural.
Although FHA loans tend to have a larger share overall, the latest increase is 67%.
It shows how much pressure homebuyers are under lately, especially those who need an FHA loan to qualify for a purchase.
FHA loans tend to go to lower-income homebuyers and/or those with lower credit scores as you can qualify for a 3.5% loan with a minimum FICO score of 580.
Meanwhile, you need a minimum 620 FICO score to qualify for a conforming loan backed by Fannie Mae or Freddie Mac.
CoreLogic notes that ongoing affordability issues have disproportionately affected low- to moderate-income homebuyers because these additional loans are often seen on cheaper properties.
The median property value of homes purchased with an FHA Plus loan was $34,600 lower ($168,600 vs. $203,200) in 2017.
This gap rose to $55,000 ($237,800 vs. $292,800) in June 2022, and to $64,000 ($255,000 vs. $319,000) by June 2024.
The most vulnerable segment of the population is arguably the most stressed, at least in terms of loan-to-value ratio.
Many FHA Loans With Piggyback Seconds Are Already Underwater
Remember the mortgage crisis that hit record lows? I haven’t written about it in nearly a decade, but it’s starting to come back into the spotlight.
This is all due to high home prices, low or no down payments, and the recent downturn in the housing market.
In fact, since inception, the average loan-to-value ratio for FHA-related loans is 98.19%.
And that’s even before taking into account the second mortgage, which puts the combined loan-to-value ratio, or CLTV, at 102.2%.
While it is not a concern whether the borrower is able to make the monthly mortgage payments, it becomes a problem when they cannot.
For example, if the economy goes down and/or the borrower loses his job, he will have no interest in that. And he may have no reason to stay…
This problem could be exacerbated if property values also decline. While home prices are still expected to rise slightly nationally, individual markets across the country are now under pressure.
The less able a borrower is to repay their loan, the more likely they are to default. Additionally, it may become more difficult for them to qualify for a streamlined refinance to take advantage of lower mortgage rates.
Technically, FHA borrowers can get a maximum LTV of 125% on a streamlined refinance if they have a second mortgage. Even having a second mortgage makes the process less streamlined.
Therefore, borrowers who are most in need of loan relief may be excluded if they carry an additional second loan that puts them in a difficult position. It may also become more difficult to sell the property.
While it’s not a problem yet, things could change quickly if the economy falls into a recession and/or housing prices start to fall.
Prior to creating this site, I worked as an account manager for a wholesale mortgage lender in Los Angeles. My experience working in the early 2000s inspired me to start writing about mortgages 18 years ago to help potential (and current) home buyers better navigate the home loan process. Follow me on Twitter for the latest news.
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