Changes to FHA Loans and Mortgage Insurance
I received this article from Roger Gettler at Legacy Mortgage. This is important information for buyers if considering an FHA loan–
Starting June 3, the Federal Housing Administration will require most borrowers using its loan products to keep mortgage insurance for the life of the loan or, in cases with a 10 percent down payment, at least 11 years.
“It’s going to push a lot more borrowers toward the conventional side,” Caputo said, referring to loans owned by Fannie Mae and Freddie Mac, which won’t alter their mortgage insurance policies. “That mortgage insurance premium is a significant chunk of a monthly payment and is something a lot of people think about.”
The FHA’s new mortgage insurance premium cancellation policy is aimed at shoring up the agency’s reserves. The FHA insures its own loans, and the fund registered a $13.48 billion shortfall last November, due largely to loan defaults tied to the recession and housing bust.
Altering the mortgage insurance cancellation policy and increasing the upfront mortgage insurance fees — a move initiated earlier this month — will generate billions in revenue.
FHA officials also hope rising costs will result in what Caputo predicted: A smaller market share as borrowers look to other mortgage products, such as Fannie and Freddie loans.
Private companies insure the low equity loans owned by Fannie and Freddie.
“In addition to protecting the (mortgage insurance fund), these changes will encourage the return of private capital to the housing market,” FHA Commissioner Carol Galante said, “and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”
First-time homebuyers will be those most impacted by the FHA changes.
FHA mortgages are easier to qualify for than most other home loan products. Underwriting standards, such as credit score, debt-to-income ratio and down payment and closing cost assistance, are less strict, and the down payment can be as low as 3.5 percent of the purchase price.
“FHA loans are vital to the housing market because they allow first-time buyers to get into the market,” Savannah Area Board of Realtors President Donna Davis said. “Even though this change is a downer — the life of the loan is a long time — the FHA loan is still beneficial to homebuyers.”
The FHA backed 15 percent of new mortgages issued in the Savannah area in 2011 and 2012 and 13 percent of home loans closed in the first quarter of 2013. Mortgage writers and Realtors estimate 90 percent of those 1,500-plus loans went to first-time buyers.
The heavy percentage of first-time buyers in the FHA’s portfolio should minimize the effects of the mortgage insurance cancellation change, many housing industry insiders say.
Statistics show first-time buyers sell their starter homes within five to seven years, on average, often before they reach the current 22-percent equity threshold that allows them to drop the mortgage insurance.
“The bigger deal is the hike in the fees because it hurts home affordability,” said Mark Konter, president of the Home Builders Association of Greater Savannah. “Remember that people that can afford the premiums as part of their payment today should be able to afford it 10 years from now.”
Save now or save later
Caputo, the loan officer with Starkey Mortgage, acknowledged most would-be borrowers are focused on the “now pain” and are quick to shrug off anything they “won’t feel today.”
They can always refinance into a more advantageous loan later.
Refinancing once a borrower reaches 20 percent equity would be one way around the FHA’s mortgage insurance cancellation policy. However, today’s buyers are not as likely to see big savings — or any savings — from refinancing given the current interest rates, which remain below 3.5 percent for most borrowers.
“No one knows where interest rates will be in five or 10 years from now, but it’s a safe bet they will be significantly higher than they are now,” said the Realtors’ board’s Davis. “Bottom line, if you are first-time buyer or anyone considering buying via an FHA loans, the time to do it and save in the long run is now.”
FHA officials are encouraging borrowers to apply for mortgages by May 24 to meet the deadline. Local Realtors expressed a greater sense of urgency. With the average FHA loan taking between 25 and 30 days to close, FHA buyers need to get homes under contract before the first weekend in May.
FHA MORTGAGE BASICS
• Approximately 15 percent of new home loans issued in Savannah are owned by the Federal Housing Administration.
• FHA mortgages are easier to qualify for than conventional loans and are popular with first-time homebuyers and those with short or incomplete credit histories
• FHA mortgages require a 3.5 percent down payment ($5,565 on a $159,000 house, the current median home price in the Savannah area) but also demand mortgage insurance ($147 a month for first year based on the aforementioned values).
• Up until June 2, FHA loan holders can cancel their mortgage insurance should they build 22 percent equity in their home based on a current appraisal (assuming a home appraised for $159,000, the owner’s loan balance would need to be $124,020 or less to drop the insurance).
• Starting June 3, new FHA borrowers will have to pay mortgage insurance premium for the life of the loan, regardless of the equity amount. The only exception is for FHA borrowers who put at least 10 percent down, and even they will be required to pay mortgage insurance premiums for a minimum of 11 years, regardless of equity amount.