21 years to save for the down payment on a house?

FHA loans exist for a reason

Guardian reporter Jessica Glenza and her boyfriend are buying a house and decided to go with a Federal Housing Administration loan. Glenza explains (in a satirical way that catches your eye), how she can finally afford a home and why some might think this is a bad thing.

It was over a plate of linguine and cream sauce that I learned I could afford a home. The government-run program allows buyers to put down as little as 3.5% of the property’s sales price.

What I found out is that the Federal Housing Authority finances about one in five homes in the US, a huge proportion. FHA financing works by allowing people to finance part of the traditional 20% down payment. 

Previously, Glenza assumed she would be forced to save for 10 to 15 years in order to pull together a 20% down payment. 

However, as she learned about this new program, she also realized the opposition to it. This is where people like Norbert Michael from the Heritage Foundation, who would rather do away with Fannie, Freddie and the FHA, come in.  

“The [government-sponsored enterprise] system has blown up more than once already in history,” said Michael. “I don’t think you should have the federal government in the business of insuring people’s mortgages,” he said.

In Michael’s view, eliminating programmes like the FHA would eliminate debt, something that financial types would refer to as “risk”. Like people, debt is more likely to experience health problems with age, and missed payments, or default, is a function of time.

As a result, this would be counterbalanced by home prices – which Michael believes are currently inflated, and would come down if the government got out of the way.

But this would also significantly impact people's ability to become homeowners. 

An analysis by the Centre for Responsible Lending found that it would take a family earning the median income, or $50,046, 21 years to save for a 10% down payment and closing costs on a house of median value ($158,100), both using 2010 census numbers. That’s derived from Americans’ average savings rate of 3.9%. It would take even longer for African-American and Latino families to do the same – 31 and 26 years respectively.

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