Home loans insured by the Federal Housing Administration (FHA) are one of the most popular financing tools used by first-time home buyers in New Jersey. In fact, a recent report by the Urban Institute revealed that 83% of these loans go to first-timers. This article explains why so many first-time home buyers in New Jersey use FHA loans to finance their purchases.

Report: 83% of FHA Loans Go to First-Time Buyers

During summer 2018, the Washington, D.C.-based Urban Institute published a study that analyzed key mortgage lending trends across the country. Among other things, this report offered some insight into FHA loans and who uses them.

Apparently, a lot of first-time home buyers in New Jersey use the FHA loan program to finance their purchases. Across our state and nationwide, roughly 83% of FHA mortgage originations are for first-time buyers. During the recession, usage among first-timers was at 75%. So it seems that more of these buyers are turning to FHA financing these days.

Definition: The Federal Housing Administration does not lend money directly to borrowers. Instead, it insures the loans made by banks and lenders in the private sector. This insurance gives lenders some protection against default-related losses. It also gives borrowers the benefit of a low down payment and flexible criteria.

Here’s a relevant quote from the August 2018 report:

“The Federal Housing Administration (FHA), which makes low-down payment loans available to borrowers with less than perfect credit, has typically focused on the first-time homebuyer market, with first-timers making up about 80 percent of their total originations. That share fell to around 75 percent during the recession but has slowly crept up to nearly 83 percent today.”

Small Down Payment, Flexible Requirements

This report clearly shows that many first-time home buyers in New Jersey prefer the FHA loan program as a financing option. And we’ve touched on some of the reasons for this already. This program offers borrowers a relatively low down payment, along with flexible qualification criteria.

• Down payment: Under current FHA guidelines, New Jersey home buyers who use this program can put down as little as 3.5% of the purchase price or appraised value. That’s one of the lowest minimum investments available these days, aside from the VA and USDA programs (which are limited to certain borrowers).
• Eligibility: FHA loans aren’t just limited to first-time home buyers. Anyone who meets the minimum criteria for this program can apply. The minimum requirements for credit scores, debt ratios, and other factors are fairly flexible, when compared to conventional / non-FHA mortgage loans.

These are the primary reasons why a lot of first-time buyers in New Jersey turn to this program. It allows for a relatively low upfront investment, and it offers flexible qualification criteria for borrowers.

Don’t Rule Out a ‘Conventional’ Mortgage Loan

By definition, a “conventional” home loan is one that does not receive government insurance backing. That sets it apart from the FHA program, which does involve such insurance.

Traditionally, conventional mortgage loans have had higher down-payment requirements than the Federal Housing Administration. But that has changed over the last few years, due to policy changes made by Fannie Mae and Freddie Mac.

Today, both Fannie Mae and Freddie Mac purchase mortgage products with loan-t0-value (LTV) ratios up to 97%. That means borrowers can make down payments as low as 3% for these kinds of loans, in many cases.

The take-home message is that conventional home loans are now more competitive with FHA, in terms of offering a relatively low down payment. So first-time home buyers in New Jersey should explore all of their financing options — and that includes both FHA and conventional loans.

Mortgage questions? Please contact us if you have questions about the different loans programs available in New Jersey, down-payment requirements, or other financing-related topics.