As I mentioned earlier this month, FHA has indeed announced changes to their guidelines. While FHA was approved by Congress to increase their monthly mortgage insurance rates by roughly 60%, the actual increase wasn’t that severe. Don’t get too excited though. There is one change that isn’t going to be very popular at all.
The announced changes include:
- Monthly mortgage insurance for borrowers making the minimum down payment will see the monthly mortgage insurance rates increase from 1.25% to 1.35%. On a $200,000 that works out to about a $17 per month increase.
- The biggest change is that mortgage insurance will be required for the life of the loan. Mortgage insurance will no longer fall off of the loan once you have 22% equity. You’ll pay monthly mortgage insurance for 30 years on a 30 year fixed FHA loan unless you make a 10% down payment when you buy the home (if you can make a 10% down payment, you more likely to be better off going conventional).
- Borrowers with a credit score less than 620 and a debt to income ratio higher than 43% will require manual underwriting for approval along with a letter from the lender explaining why this borrower was approved. Individuals looking to buy a home that fall into this category will be hard pressed to find a lender who will process their loan.
As expected, these changes make conventional loans look way more attractive. For example, let’s assume you are looking to buy a home and have a credit score 720 or more. With today’s PMI rates, the monthly mortgage insurance on FHA loans is twice as much than conventional loans with a 5% down payment.
Let’s use a $200,000 purchase price again and compare FHA and conventional loans:
- The FHA down payment is only $7,000, but the monthly mortgage insurance is $220 per month.
- The conventional loan down payment is a little higher at $10,000, but the monthly mortgage insurance is $107. That is a savings of $113 per month (over $1,300 per year).
Why the changes? It is twofold. First, FHA is looking to raise money because their reserves are exhausted. Increasing mortgage insurance and requiring it for the life of the loan would help replenish their reserves that have been severely hurt by the foreclosure crisis over the past few years.
The second reason is to reduce the number of FHA loans they insure. By making it more expensive to use an FHA loan, it will steer borrowers to conventional loans – which is the goal of the government so they do not have to insure as many mortgages as they are currently funding.
The moral of the story – if you are looking to buy a home using an FHA loan, you want to get started and closed before these changes take effect. If you are buying in the state of Georgia, I can help you get started with the prequalification process today. Don’t delay as these changes are coming!
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