The dual crises of the COVID-19 pandemic and 2020 recession threatened a rise, if not surge, in Federal Housing Administration (FHA)-insured mortgage popularity. Not to be outdone, conventional loan financing has actually seen an uptick among first-time buyers. But how much staying power does this trend wield?

Nothing gold can stay

According to a survey by the National Association of Realtors, in January 2021 alone, 59% of first-time buyers obtained conventional financing for their homes. Throughout the year 2020, the number of first-time buyers who obtained conventional financing was 57%. This percentage increase is up from 52% in 2019. In contrast, FHA-insured financing fell from 29% in the year 2020 to 24% in January 2021.

Given the FHA’s Depression-era origins, one could be forgiven for assuming the ongoing 2020 recession would renew the popularity of FHA-insured mortgages. FHA-insured mortgages, which boasted a smaller down payment, were once considered the more appealing option for first-time buyers. So, what’s changed?

The insurance cost gamut

FHA-insured mortgages require an upfront mortgage insurance premium (UPMIP), to be paid at the time the loan is obtained, and a subsequent monthly mortgage insurance premium (MIP). Not only does the MIP add to the buyer’s monthly payment, they are also required to pay the MIP for the entire life of the loan — not to mention interest.

The only exception to paying the MIP throughout the life of the loan is when the buyers put 10% or more down. In that case, the MIP will be cancelled after 11 years — but this is a rare occurrence.

New competition

Mortgages that fall under Fannie Mae/Freddie Mac guidelines do not require an UPMIP nor continued payment of the MIP once the home’s equity reaches 80%.

While 3.5% down is the minimum for FHA borrowers, Freddie Mac and Fannie Mae in November 2020 became more competitive, only requiring 3% down. Shaving down these upfront costs has made conventional financing more attractive to first-time buyers.

Other considerations

 The costs and length of mortgage insurance is not the only thing to consider. The ultimate monkey wrench in this mortgage runaround is that most first-time buyers won’t keep their mortgage for the full 30-year term.

The National Association of Realtors published another report in March 2020 showing the typical home is owned for an average of 10 years before being sold. Freddie Mac reports that mortgage refinances typically occur an average of 3.2 years from loan origination. This average is of course dependent on — and moves with — interest rates. Refinances and loan trades rise as interest rates lower, and fall as interest rates rise.

Thus, the deciding factor on which mortgage is most appropriate for your client is time. This includes how long a homeowner intends to live in their home and how long they are willing to pay mortgage insurance.

Shopping and comparing multiple lenders is your client’s best plan of action. Preparing yourself by knowing the status of your credit report (and rectifying any errors should you find them), your proposed loan’s interest rate and annual percentage rate (APR) and taking diligent, comparative notes on each estimate will go a long way in securing the most favorable mortgage terms possible.

Editor’s note — Agents: download our Mortgage Shopping Worksheet (RPI Form 312) to help your clients quickly decide between their mortgage options.