Within hours of being sworn in on January 20, President Donald Trump signed an executive order rescinding a previously announced cut in the mortgage insurance premium rate charged for Federal Housing Administration (FHA) home loans. This largely unexpected move has focused attention on the real estate market and its key players, including contractors. Here are more details about the mortgage insurance rate cut and what it means for contractors.
FHA loans have historically been popular with first-time homebuyers, in part because they require a smaller down payment – as low as 3.5% - compared with the typical lender requirement of 20%. In exchange for offering these loans, the FHA requires that borrowers pay for mortgage insurance, which protects the lender if the borrower is unable to pay off the loan. The Obama administration had previously announced a cut to the mortgage insurance rate that was to take effect January 27, and which would have resulted in estimated savings of $500 per year for the average homeowner. Trump’s order puts a stop to that rate cut.
For existing borrowers, Trump’s order means they will continue to pay the same amount they paid previously. The order instead would primarily affect new borrowers who may have been hoping to see a decrease in their payments. Prospective buyers who are looking for a home may now have to adjust their target home purchase price in order to afford the monthly mortgage payments.
Contractors will also be affected by changes in mortgage insurance rates. If buyers who are currently in the market for a new home are counting on a FHA loan in order to purchase their home, they may now be planning on a lower purchase price than they would have with a lower mortgage insurance rate. As a result, contractors may be facing a smaller pool of prospective buyers if fewer people are able to afford the homes they offer. Another issue to consider is whether contractors should refine their marketing plans in order to target customers who can afford homes in their price range. With potentially fewer buyers able to purchase a home at a given price point, contractors may also need to determine whether offering upgrades or other incentives may be necessary to get buyers in the door.It is difficult to predict what will happen in the real estate market as a result of this change in mortgage insurance rates. If you're a contractor needing to plan for how this and other changes might affect your business, we're here to help