A New Hope For First-Time Homebuyers

New FHA limits and down-payment assistance help borrowers get into homes

Insider

President, CBC Mortgage Agency

Few can deny that first-time homeownership is an uphill battle these days. Between higher home prices, low inventory, an uptick in mortgage rates, and rising inflation, it has become increasingly difficult for lower-income borrowers to find affordable homes and start generating homeownership wealth.

By raising loan limits for first-time homebuyers, the FHA has delivered some hope for potential borrowers in the new year. FHA loan limits are now $420,000 in most U.S. counties and as high as $970,000 in particularly expensive markets. The $420,000 limit applies to counties where 115% of the median home price is less than that amount.

The raised limits are especially welcome given the robust gains in housing prices nationally. But do the new FHA loan limits give would-be homebuyers enough optimism to keep their homeownership dreams alive, in spite of the obstacles in their way? It’s an important question because obstacles are growing larger by the day.

Confronting challenges and obstacles

As inflationary pressures hit the country, one need look no further than the nation’s housing market as a key indicator for the high cost of living. The most recent S&P CoreLogic Case-Schiller data found home prices continued their upward march across the U.S. in November, rising 18.8% annually — the sixth-highest reading in 34 years, according to Craig J. Lazzara, S&P DJI managing director.

Despite rising rates, low housing inventory will likely push home prices higher for the foreseeable future. In the past couple of years, investors and all-cash buyers have competitively bid up home values, making appraisals sometimes irrelevant to what buyers will actually pay. Even buyers who had been lucky enough to receive help from family members found steep competition from cash offers. Frequently, the amount of funds needed to meet minimum down-payment and closing-cost requirements, made it difficult for would-be homeowners to compete with cash offers.

First-time buyers face yet another challenge that makes homeownership less affordable. According to the National Association of Realtors, the median rent for 0–2-bedroom properties soared 19.3% between December 2020 and December 2021. By the end of the year, rents were increasing at six times the rate pre-COVID. Increasing rents make saving for a down payment exceptionally difficult. Constant rent increases combined with rising home prices are crushing the aspirations of families.

But it’s not just families who are struggling. One of the emerging drivers behind today’s housing market are single women, who are increasingly looking at homeownership to build long-term wealth. In fact, according to recent Bank of America data, 65% of single women say they would rather buy a home before marriage, and nearly one-third of all current female homeowners actually purchased prior to tying the knot.

However, the bank also found that more millennials and Generation Z consumers aren’t planning to have kids, which has historically been one of the largest factors behind the decision to buy a home. And for many, the decision whether to first start a family or buy a home is irrelevant if they can’t afford either one.

Reaching out for resources

While the increase in FHA loan limits is encouraging, current conditions prove that assistance for first-time homebuyers has never been more important than it is today. Fortunately, help is available.

A number of down-payment assistance (DPA) programs offered through state housing finance agencies (HFAs) and other government and non-profit organizations can help cover a first-time buyer’s down payment and closing costs, which can range on average from 3% to as much as 7% or more depending on the agency. CBC Mortgage Agency, for example, offers down-payment assistance through its Chenoa Fund program. With it, buyers can get a forgivable or repayable second mortgage that covers up to 5% of the purchase price of the home.

DPA is a perfect complement to FHA loans. Some state housing agencies and employer-sponsored homebuyer programs offer free-standing down-payment and closing-cost assistance. However, the vast majority of DPA programs are used in combination with a first mortgage originated through lenders already approved by a housing finance agency.

In most cases, DPA can be combined with other sources of assistance, such as qualified gift funds and grants. DPA programs are most commonly structured as either deferred payment second mortgages with zero interest (also known as “soft seconds”), fully amortizing second mortgages repayable with interest, or through grants.

Too many first-time buyers end up “house poor” because they poured all their savings into a down payment and are unable to absorb the unexpected costs of maintaining their home.

The mechanism through which state housing agencies fund the DPA has evolved over time. Historically, assistance was enabled by federal funds distributed to qualified municipalities and non-profits. Today, most DPA programs are funded by the gains achieved through selling and trading of mortgage-backed securities in the capital markets.

Of course, it’s one thing for first-time buyers to get financing for a home, but it’s even more important to keep it. Too many first-time buyers end up “house poor” because they poured all their savings into a down payment and are unable to absorb the unexpected costs of maintaining their home.

For this reason, CBC Mortgage Agency provides an 18-month-long post-purchase homeowner counseling program known as the Borrower Success Program. Through a collaborative relationship with a HUD-approved housing counseling agency, the educational program offers support and coaching for borrowers in transition to homeownership, and deals with everything from leaky faucets to financial stressors.

The bottom line is that FHA’s loan limit increase is welcome news. As it should, the agency rose to the occasion and new limits with programs to assist borrowers are giving new hope to first-time homebuyers, an increasing number of whom are women. But for many, this move alone isn’t enough to overcome the impacts of rising home prices, inflation, and the likely increase in rates.

That’s why DPA programs are so important, and why they need to be available for future generations of homebuyers. As long as that happens, the American Dream can survive, and homeownership will remain affordable and an attainable opportunity for all.