The Finatical

Week of January 24th, 2023 - FHA Loans, Fed Rates Climb, Crypto Regulation

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Jan 24, 2023

Introduction

There are many ways to get a loan on a home and you may have already heard of some of these ways, including getting a conventional mortgage, VA loan, or USDA loan. However, if you don’t qualify for these, there are also FHA loans! A government-backed mortgage that is insured by the Federal Housing Administration is known as an FHA loan. FHA home loans are particularly well-liked by first-time homeowners since they have lower minimum credit score requirements and down payments than many conventional loans. Despite the fact that the government insures these loans, private FHA-approved third-party mortgage lenders actually underwrite and manage them. As you improve your credit, they let you put down less money, but this flexibility comes at a hefty upfront and ongoing expense in the form of mortgage insurance payments.

How They Work

If you don’t know much about loans already, you might be wondering how FHA loans actually work. Essentially, FHA loans are available with fixed interest rates and periods of 15 and 30 years. In order to enable borrowers who would not be eligible for private mortgages have an opportunity to become homes, the agency has flexible underwriting requirements. For example, the minimum credit score to get an FHA loan is 500, while most conventional loans’ minimum credit score is 620. Also, keep in mind that there will be restrictions on the mortgage amount regardless of the sort of FHA loan you are looking for. The $450,000 to $1,100,000 range represents the FHA loan limitations for 2023. A DTI of 50 or less is also required by the FHA, which means that your total monthly debt payments cannot exceed 50% of your pretax income. The home you want to purchase with an FHA loan must also fulfill basic FHA property standards. A separate assessment, different from the typical home inspection, is required by the FHA. They want to see whether the house is a good investment, or worth what you're paying for it and that it complies with minimal requirements for safety and livability. If you qualify for these requirements, an FHA loan could be a possibility for you.

Drawbacks

Keep in mind, though, that there are some drawbacks to FHA loans compared to other types of home loans. Firstly, borrowers are required to pay FHA mortgage insurance, which shields the lender from loss in the event of a failure. When borrowers put down less than 20%, mortgage insurance is usually necessary. Another con is that if you apply for an FHA loan, the property itself must meet specific requirements. The most important requirement is the price, as FHA-backed mortgages are not allowed to exceed a certain price range, which varies by region. You must also live on the property since FHA loans are not designed for second homes or investment properties. FHA loans also have another disadvantage that most people don’t realize. If you’re planning to buy a house in a competitive seller’s market, you may be at a disadvantage by using an FHA loan. This is because sellers want to know information about possible purchasers, and an FHA loan does not indicate as strong purchasing power as a traditional loan. Furthermore, the seller may be concerned that additional regulations may hinder the transaction, so If you're purchasing in a hot market, you might want to look into alternative options for financing.

Financial Trends

Fed Forecasts Higher Interest Rates

This Wednesday, Federal Reserve officials released a video that enforced their mission to fight inflation and issued the news to the country that higher interest rates will remain in place until inflation starts to reduce. At their last meeting in December, policymakers raised the interest rate by another 0.5 percentage point, expressing the importance of maintaining a restrictive policy while inflation is still high. This past year’s increase in rates ended a streak of four consecutive three-quarter point rate hikes, making the target range for the benchmark funds rates 4.25% to 4.5%, the highest level in nearly 15 years. Officials also stated that they will also focus on data as they move forward in handling the economy this year and prioritize “the need to retain flexibility and optionality” regarding policy.

After the meeting, Fed Chairman Jerome Powell pointed out that while there has been progress in the battle against inflation, he noticed signs of decline and expected rates to hold at even higher levels, despite the increases ceasing. This statement indicated that no FOMC (Federal Open Market Committee) members expect there to be cuts in 2023, despite market pricing in various industries. Currently, markets are priced in the range of 0.5-0.75 percentage points before taking a break to analyze the impact of the interest rate hikes on the nation’s economy. According to CME Group data, financial traders are hoping that the central bank will approve a quarter-point increase at the next meeting in February 2023.

House Republicans Move to Regulate Crypto

This Thursday, Republican lawmakers announced that they would be launching a new subcommittee that will be responsible for overseeing the two upcoming industries, cryptocurrency, and fintech. Republican, French Hill, from Arkansas will chair the subcommittee on digital assets, financial technology, and inclusion; all of which will be a part of the House Financial Services Committee. This subcommittee was created because the unregulated nature of the crypto industry became a big concern at the end of last year with the scandal regarding FTX. In 2019, prior to FTX becoming a major company, Hill signed a letter that urged the IRS to refine its tax guidance for cryptocurrency users. The letter had the key phrase from Hill emphasizing the need for improvement and change regarding cryptocurrency regulation in the nation, “Ambiguity impedes appropriate tax compliance”.

Federal regulators have accused Bankman-Fried of committing criminal campaign finance violations while they perpetuated an $8 billion fraud. FTX’s collapse and Bankman-Fried’s eventual indictment have acted as an opportunity for Republicans to criticize the work of previous Democratic regulators. As a result, Senate Democrats have already started to take action to prepare themselves to oversee the crypto industry and dictate enforcement actions. Since FTX drowned into bankruptcy, the SEC has begun a lot more active in regulating different businesses and the commission has changed crypto lender Genesis and exchanged Gemini with the unregistered sale and offerings of securities.

Financial Guidance

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

Follow market trends and history. Don't speculate that this particular time will be any different.

Term of the Week

Estate Tax: The estate tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or has certain interests in at the date of death.