California Conventional Home Loans Pull Further Ahead of FHA Program

Revised mortgage guidelines issued by Fannie Mae and Freddie Mac have made conventional loans more popular among California home buyers seeking a low down payment. A recent report shows that California conventional loans have widened the gap even more, during 2018.

California FHA Loans Lag Further Behind Conventional

A report published by ATTOM Data Solutions this year showed that even more borrowers in California and nationwide are opting for conventional loans over FHA.

According to the company’s “U.S. Residential Property Loan Origination Report” for the first quarter of 2018, FHA loans made up 10.9% of all home loans originated during that quarter. That was a decline of 2.4% from a year earlier.

Conversely, this means that a higher percentage of home buyers in California prefer to use conventional loans. This could be because “regular”mortgage loans offer lower down payments these days, putting them in direct competition with the FHA program.

Before we go any further, let’s cover some of the terminology being used here:

• Conventional loans, are the most common mortgage product used by home buyers in California and nationwide. They are not insured or guaranteed by the government, and this makes them different from the FHA program below. The minimum required down payment can be as low as 3% for eligible borrowers.
• FHA loans, on the other hand, are insured by the Federal Housing Administration (a government agency). Because of this backing, the requirements for the program can be a bit more lax when compared to conventional. The minimum required down payment for an FHA loan can be as low as 3.5% for eligible borrowers.

Most home buyers in California use conventional mortgage loans when buying a house or condo. FHA comes in at a distant second, followed by the VA program for military members. The same is true for homeowners who are refinancing their homes — conventional is the #1 choice there as well.

While conventional has always been the “go-to” mortgage option for the majority of California home buyers, the gap has widened even more over the past year. This could be due to the lower down payments that are available with conventional loans these days.

Down Payment Requirements Are Similar

These days, the minimum down-payment requirements for California FHA and conventional loans are very similar. In the past, FHA offered the lowest down payment for borrowers with limited funds saved up. But that changed over the last couple of years, as Freddie Mac and Fannie Mae revised their guidelines.

Fannie and Freddie are the two “government-sponsored enterprises,” or GSEs, that buy mortgage loans from lenders. They purchase conventional loans that meet certain guidelines, such as the financing amount. In recent years, both organizations increased their maximum loan-to-value (LTV) ratios to 97%. This means eligible borrowers in California can qualify for a conventional loan with as little as 3%.

It also means that conventional loans are now competing directly with the FHA program, for borrowers who are seeking a lower down payment. This is probably part of the reason why we are seeing a slight shift in market share, as noted in the ATTOM Data Solutions report.