FHA finally reduces the amount borrowers will pay on a monthly basis for mortgage insurance. This is something the writers here at The Mortgage Blog have clamored about for years now. What exactly did FHA do?
The change is the amount borrowers pay on a monthly basis. Assuming a borrower makes the minimum down payment, the annual premium is 0.85% (or 0.0085) of the loan amount. Then divide that figure by 12 for the monthly amount. The new figure for those making the minimum down payment drops to 0.55%…. a 30 basis point reduction.
Per the announcement, FHA expects this to save borrowers, on average, $800 per year. Some quick examples:
Using rough numbers, a purchase price at $300,000 would save about $600 per year
A purchase price of $350,000 would save close to $1,000 per year.
The $800 on average makes sense when looking at homes over $300,000.
FHA mortgage insurance is different than conventional in that the coverage amount (0.55%) is the same regardless of the credit score of the borrower. Mortgage insurance on conventional loans change depending on borrower’s credit score and the amount of the down payment. There are two situations where FHA mortgage insurance changes:
When making a 5% down payment (and not the minimum 3.5% down), the mortgage insurance drops to 0.50%
When making a 10% (or larger) down payment, the mortgage insurance premium stays the same, but the borrower no longer pays mortgage insurance on a monthly basis after 11 years.
In my 17 years in the mortgage industry, I’ve rarely had anyone get an FHA loan with a larger down payment. Almost everyone goes with the 3.5% option, so the mortgage insurance is fixed at 0.55% for the life of the loan.
The “permanent” state of the mortgage insurance is what I would like to see changed. Conventional loans eventually drop their mortgage insurance coverage. I think it should be the same for FHA loans too. There is no reason why someone should still be paying mortgage insurance after 11 years when they have a lot of equity in the home.
Yet beggars can’t be choosers. FHA mortgage insurance premiums were set at 0.85% and permanent for many, many years now. Hopefully this is a first step (and needed change), and maybe soon it can also go from “permanent” to 11 years max payment on mortgage insurance. One can dream!
Staying on my theme of credit this month. I’m building on a post from my colleague in late August about credit scores. Last week I gave some real world numbers of the impact credit scores can have on mortgage payments and mortgage insurance.
This time I want to focus on how to avoid the worst parts of lower credit. What I mean is this… Is there a way to avoid the worst impact of a higher rate and/or higher mortgage insurance? Can we reduce the increase of a payment due to higher rate and/or mortgage insurance?
There isn’t much that can be done to improve someone’s credit score if they have legitimate missed payments OR a thin credit profile. That said, there are some things people can do to reduce the impact on the rate and/or mortgage insurance premiums for those with lower credit scores.
Pay off credit card debt: Let’s say a borrower’s credit score is low because of high utilization of credit card debt (not multiple late payments on credit accounts). A maxed out credit card is a quick way to lower a score, and paying it down/off is a great way to make the score jump. I had a client decide to make a 10% down payment instead of a 20% down payment. He used part of his originally planned down payment to pay off all credit card debt, and his credit scores went from the 660s to the 740s (just like weight loss programs, “results can vary.”) Sure, he now pays mortgage insurance. With a credit score over 740 and 10% down, he paid about $70 per month and got a great interest rate. While paying mortgage insurance is a bummer, the amount he was paying each month on his credit cards was way more than $70 per month AND he saved tens of thousands of dollars over the life of the loan by getting a lower rate.
Avoid store based credit cards: I see buyers get in trouble all the time with this. Sure getting an extra 10% off a purchase is nice, but it could cost you. Most store credit cards come with a low limit. Why? Because in a pinch, the first credit cards that don’t get paid are the ones to Kohls, Best Buy, Macy’s etc. These stores do not want a high balances to get reached, so they keep the limit down. Let’s say I get a store credit card to an electronics store to purchase a laptop for my child going back to school. If I get a limit of $1500 on this store credit card and the laptop costs $1200, all of the sudden it looks like I am close to maxing out a credit card and credit scores go lower. Credit score models are not based on total limits versus total debt load. It looks at each credit card individually in terms of its utilization. Also, most people forget to pay store credit cards. It happens A LOT. A missed credit card payment is a missed payment whether it is a major credit card or a store credit card.
Make a larger down payment: It doens’t seem like much, but putting more than the minimum down payment can make a big difference on mortgage insurance and also the interest rate.
10% down versus 5%: while the rate is the same, the mortgage insurance payment drops by 40% in my examples from last week AND the borrower will not be required to even pay the mortgage insurance as long as it is for someone making the minimum down payment.
20% down: if paying off debt isn’t an option (meaning, legitimate late payments and/or collections), then this gets rid of mortgage insurance entirely. The rate will still be higher, but it avoids the double whammy of higher rates and higher mortgage insurance premiums.
40% down: yeah, that is a large down payment. Why am I pointing it out? When putting 40% down, a borrower gets the same rate whether they have a 660 credit score or an 800+ score. The rate is only slightly worse (say 0.250% higher) for credit scores in the 620-659 range.
15 year fixed loans: The rate for 15 year loans are the same whether a borrower has a 620 credit score or one over 800. Yes, you read that correctly. Maybe a large down payment isn’t possible. Perhaps paying down credit card debt isn’t an option. This could be. Also if making less than a 20% down payment, the difference in mortgage insurance is about $110 more per month for a 679 credit score versus a score over 760. Borrowers avoid a much higher rate, avoid the bigger brunt of the mortgage insurance increase AND get the benefit of paying off their home in half the time versus a 30 year loan.
Co-Borrower on the loan: this one sounds silly, but it’s true. Let’s say the borrower has a significant other they were not planning on being on the loan. Perhaps they are self employed and do not show a lot of income. Perhaps they are the primary caregiver for their children and earn no income outside of the home. The reason does not matter. If their credit score is the same (or better) than the primary borrowers, the mortgage insurance premiums each month drop by roughly 20% simply by having two people on the loan (the mortgage rate is still the same).
FHA loans: when all else fails, this is a great option. I’ve said FHA loans until now for two reasons. One is the up front mortgage insurance premium rolled into the loan amount (meaning borrowers do not pay this out of pocket at closing as it is added to the loan itself) and the mortgage insurance is permanent. The advantages of an FHA loan is the rate will be better for someone with a credit score under 680 (versus a conventional loan), and the mortgage insurance each month would be less. If this isn’t a “forever” home, then the word “permanent” isn’t as scary. We could do a compare/contrast to see if an FHA loan is beneficial to a borrower’s monthly cash flow.
VA loans: for those who qualify, there is no monthly mortgage insurance, and the rate isn’t as bad for those with lower credit scores compared to conventional loans.
There you have it. Some ways to mitigate the impact of lower credit scores when purchasing a home. I know this can all be overwhelming. If you are looking to buy a home in Georgia, need a mortgage, and have some credit problems, contact me today to get started. We can take a look at your situation and see what we can do to mitigate the impact on your home loan.
At a recent mortgage bankers conference, a Department of Housing and Urban Development (HUD) executive stated that HUD is considering lowering FHA mortgage insurance premiums. The executive stated that no decision has been made, but the topic is the subject of intense analysis and priority at HUD.
As a mortgage loan originator, I would welcome this change. From my perspective, conventional loans are often more attractive to borrowers than FHA loans because (1) FHA’s up-front mortgage insurance (MI) premium, (2) possibly higher monthly FHA MI premiums, and (3) FHA monthly MI premiums can be permanent.
FHA mortgages are meant to help borrowers who can only make low down payments and who have less than great credit scores. Home buyers can obtain FHA loans for a minimum 3.5% down payment. FHA does not adjust interest rates as much when the borrower’s credit score is lower, and FHA also does not adjust MI premiums for lower credit scores. FHA loans can be great for borrowers with credit scores less than 680 and who cannot make a 20% down payment.
FHA charges a 1.75% up-from MI premium for all loans. Conventional loans do not charge an up-front MI premium. On a $300,000 loan, this costs the borrower $5,250. Advantage, conventional loans.
FHA charges a 0.85 monthly MI premium when the down payment is less than 10%, and a 0.80 monthly MI premium when the down payment is more than 10%. These premiums do not vary based on the borrower’s credit score. This makes FHA loans more attractive to borrowers with lower credit scores and less attractive to those with higher scores. For a $300,000 base loan amount with a 3.5% down payment, the monthly FHA MI premium would be $212.50. For comparison, here’s a list of possible conventional monthly MI premiums for different credit scores (circumstances may vary):
620 Credit Score – $427.50
640 Credit Score – $327.50
660 Credit Score – $232.50
680 Credit Score – $197.50
700 Credit Score – $162.50
720 Credit Score – $132.50
If the borrower makes a 10% or more down payment, FHA requires monthly MI premiums for 11 years. If the borrower’s down payment is less than 10%, the MI premiums are permanent. Conventional MI can be canceled based on specific criteria. If the buyer plans to keep the home for many years, the non-permanent aspect of conventional MI could save them money.
Ultimately, there are many details to evaluate for a home buyer with a less than 720 credit score and limited cash for a down payment. I do hope FHA will lower MI premiums. I also hope FHA will consider eliminating the permanent nature of mortgage insurance for buyers with less than 10% down payments. If nothing else, FHA should terminate the mortgage insurance after 11 years. There is no reason for someone to pay mortgage insurance for the entire 30 year loan term. Before it was made permanent, FHA required mortgage insurance for 11 years on all homes. If HUD elects not to change the MI premiums, I think they should at least make this change.
Do you know someone who wants to buy a home in Georgia? Connect them with me and I will help them evaluate all the different loan options based on their specific circumstances and plans, helping them obtain the mortgage that best meets their needs.
I am going to pick up right where my colleague Rodney Shaffer left off with his recent blog post. Buyers do not need 20% down to purchase a home. Honestly, we should do a post on this topic monthly because we hear it monthly from clients who think they way more down than is necessary to purchase a home.
Rodney’s recent post focused on an article he came across saying “20% is best” when buying a home. What the article doesn’t detail is home appreciation is rapidly outpacing one’s ability to save. So a $300,000 home with 20% down won’t be the same home when the $60,000 is saved years from now.
I’m focusing on a recent study by the National Association of REALTORS stating almost half of would be home buyers believe they need a larger down payment than is actually required. About 35% of would be buyers believe the down payment needed is more than 15%. Another 10% of would be buyers believe the minimum down payment requirement is more than 20%.
You do not need 20% down in order to purchase a home:
Conventional loans require as little as 3% down. Meaning, a home at $600,000 could be purchased with as little as $18,000.
Ideally buyers put 5% down for conventional loans as the interest rate is better and the monthly PMI is lower. On the same $600,000 home, the down payment would be $30,000.
FHA loans only require 3.5% down. The max FHA loan limit in metro Atlanta is just over $470,000. Meaning, a purchase price just under $490,000 with 3.5% down (roughly $20,000) is all that is needed.
I know there is an aversion to paying monthly Private Mortgage Insurance (PMI). This is required when purchasing a home with less than 20% down. I get it, yet, PMI payments aren’t necessarily the end of the world. Let’s look at two recent clients:
One client purchased a home around $300,000 and had 15% to put down. Instead of waiting to save an additional $15,000, they put 15% down and will pay $26 per month in PMI for just a few years.
Another client purchased a home around $400,000 and put 10% down. Instead of waiting to save an additional $40,000, they are paying just over $40 per month in PMI for several years.
When you compare the monthly payments on PMI to continuing to rent, not getting appreciation for a home you own, locking in an interest rate now, trying to save more and more money… paying PMI isn’t as bad as it seems.
If you’ve made it this far into the post – thank you for reading! If you do not remember anything else from this post, please remember (and tell all your friends), buyers do not need 20% down to purchase a home!
Speaking of purchasing a home, if the purchase is in the state of Georgia, contact me today! I can get you well on your way to owning a home!
FHFA is now allowing rental history to be included for qualifying purposes on buyers. This is new and in the process of being implemented. Here is how it could work:
the borrower’s must be be first-time homebuyers
pay a monthly rent of at least $300
purchase the house as a primary residence
consent to sharing 12 months of their bank statement history to verify rent payments.
Lenders must obtain a verification of asset report from one of Fannie Mae’s approved vendors to include with the borrower’s file.
While this is FHFA’s recommendation, lenders could add overlays to the requirements (in other words, more requirements). What is an example of an overlay? Here is an easy on on FHA loans:
Before Covid, some lenders would approve an FHA loan with a credit score at 580. FHA will still accept those loans if they receive automated underwriting approval.
Even though still acceptable, during the first year or so of Covid, most lenders increased their FHA credit score requirements to as high as 680. Most have gone down some to 640. I am not aware of lenders still doing FHA at a 580 credit score.
That is an overlay.
Again, this rental history is new, so unsure of how it will officially work. Something I would expect to see added, for example, is proof of when rent is due. A bank statement only shows when a payment is made and not when a payment is due. I’d expect a copy of the rental lease agreement to be required as an overlay to this.
Regarding the change, Fannie Mae says this change is not relaxing credit standards. Instead, it’s looking for reliable indicators of the borrower being able to meet our credit standards. The thought process is if rent is being paid on time, then a mortgage will be paid on time too.
How much of an impact will this make? According to Fannie Mae it would have allowed a little more than 10% of buyers who were denied be able to purchase a home. Let’s see how this gets rolled out and how much of an impact it will have. Implementation of something new like this is always…. interesting.
I know I posted this information about a year ago, but I hear this myth so often in the mortgage market, I will keep repeating this…..You do NOT need 20% down to buy a home!
According to recent National Association of REALTORS data, the average down payment made by recent home buyers is 12%. Younger buyers tend to put down less. Buyers between age 22 and 30 made an average 6% down payment. Recent home buyers between age 31 and 40 made an average 10% down payment. This ultimately follows common sense, as younger buyers have had less time in the work force to save for a down payment.
Veterans using VA mortgage financing can obtain loans with a 0% down. FHA mortgages have a 3.5% down payment requirement. And borrowers can obtain conventional mortgages with only 3% down.
The 20% down myth is driven by the fact that borrowers must pay PMI when obtaining a conventional loan with less than 20% down. Many home buyers want to avoid the added PMI cost in their monthly payment. But I personally think that PMI is an effective tool to help people buy homes and build wealth sooner. I recently had a friend refer his adult daughter to me. When I counseled her to make a 5% down payment and pay the monthly PMI, Dad challenged me. He did not want her to pay PMI. In my next blog post, I’ll explain my PMI response to Dad. Spoiler alert….the daughter did by a house with 5% down and paying PMI – it made very good financial sense.
Do you know a friend or family member who wants to buy a home in Georgia? Don’t let them by discouraged by the 20% down myth. Tell them that is only a myth and then connect them with me. It is very possible that I can help them finance a home purchase sooner, instead of waiting to save more money. We will work to make their home ownership dreams a reality – hopefully right now.
FHA continues tweaking its guidelines this year. Still hoping FHA will change its requirement of mortgage insurance being permanent. Until then…. this recent change is a good one!
Currently, FHA is strict when it comes to student loan payments. It isn’t as simple as using what is shown on someone’s monthly statement. If the student loan is in an income based repayment plan, the monthly payment must still be an amortizing payment (meaning, the loan will still be paid off in its allotted time frame). If not, then the qualifying payment defaults to 1% of the student loan balance. If a student loan is in deferment, again, use 1% of the balance.
Contrast this with Conventional loans handling of income based repayment plans. Even if the payment is $0, as long as it is in writing from the student loan company, then $0 can be used for loan qualifying.
If a student loan is in deferment, then a borrower can be qualified using 0.5% of the current balance as the payment OR the actual payment once out of deferment (must be in writing from the student loan company).
FHA caught up to the trend of Conventional loans and will now have similar guidelines:
if a loan is in deferment, then only 0.5% of the balance is required for qualifying
income based repayment plans are allowed so long as it is confirmed in writing
the payment on an income based repayment plan no longer needs to be an amortizing payment
This is great news for buyers looking to use an FHA loan for their home purchase while balancing their purchasing power with student loan debt.
Looking to purchase a home? Have student loans and wonder how it will impact you? If you are buying in the state of Georgia, contact me today! In a few minutes, we can answer many of your questions and have you one step closer to home ownership!
The House Financial Services Committee has passed a bipartisan bill related to FHA loans in hopes of making it easier for home buyers to use FHA loans to purchase a home.
One change I’ve personally been hoping for with FHA loans is allowing FHA mortgage insurance to eventually be removed from the loan. As has been the case for several years now, FHA mortgage insurance is still permanent.
So what is the recent change?
The bill reduces the number of hurdles which appraisers currently face before they are allowed to perform appraisals for home purchases financed by an FHA mortgage. Federal standards set for FHA appraisers would be brought in line with the federal minimum requirements already in place for other home mortgages, particularly those purchased by Fannie Mae and Freddie Mac.
This would help address the current shortage of certified appraisers that some parts of the country are facing. The lack of appraisers for FHA-insured mortgages has a disproportionately large impact on first-time homebuyers, low- and moderate-income households, and people of color.
“The process of purchasing a home is already difficult enough for first-time, low-income, and minority homebuyers. They do not need the added challenge of finding a certified appraiser,” said Rep. Brad Sherman who sponsored the bill. “This legislation is a commonsense revision to current appraisal requirements which will make FHA mortgages accessible to more Americans.”
So a common sense change made for FHA loans…. perhaps another common sense change would be allowing mortgage insurance to fall off once 20% (or 22% or 25%) equity is reached. Anything is better than the current “permanent” status FHA loans require.
A recent National Association of Realtors (NAR) economist blog noted that 24% of first-time home buyers obtained FHA financing in January, while 59% obtained conventional mortgage financing. This is very interesting as it contrasts the picture painted in my blog post from September 2019. That post noted that 75% of Millennial home buyers obtained FHA financing. While not all first-time home buyers are Millennials, the recent data still appears to be a significant change from only about 18 months ago.
FHA mortgages once attracted many first time home buyers with a 3.5% minimum down payment. But beginning in 2014, home buyers could obtain conventional loans with only a 3% down payment. FHA loans also appeal to home buyers with lower qualifying credit scores. Conventional interest rate pricing charges higher interest rates for lower credit scores. Because FHA pricing places less emphasis on the borrower’s credit score than conventional loans, FHA pricing was often more attractive to buyers with credit scores less than 700, especially when those buyers could only make a small down payment.
Note that “standard” conventional loans with a 3% down payment require the borrower to pay a higher interest rate and mortgage insurance premium as compared to 5% (or more) down conventional loans. But conventional mortgage giants Fannie Mae and Freddie Mac began offering special loan programs (called Home Ready and Home Possible, respectively) to home buyers whose annual income falls below a threshold (currently about $65,000 in the Atlanta area) and with credit scores of 680+. With these programs, 3% down conventional loans become very competitive with FHA loans for buyers who qualify.
When a buyer qualifies for the Home Ready / Home Possible program discounts, they can save money in two ways as compared to FHA financing. First of all, conventional loans do not require up-front mortgage insurance. FHA loans require a 1.75% up front mortgage insurance premium that is typically rolled into the loan amount. Secondly, when the borrower’s equity reaches 20%, the conventional loan mortgage insurance can be cancelled, even when the borrower initially made only a 3% down payment. Borrowers who use FHA mortgages with less than a 10% down payment must pay monthly mortgage insurance premiums for as long as they own the mortgage. The monthly FHA insurance premium is 0.85 for all loans with less than 10% down payments. That is about $177 per month on at $250,000 mortgage. The fact that such a large insurance premium is permanent makes many buyers consider conventional loans more favorably.
Are you considering your first home purchase? Be sure to explore all the loan programs available to you, including conventional and FHA mortgages. Give me a call and I’ll help you compare your options to determine which will give you the lowest total payment, considering both the interest rate and the mortgage insurance components.
As expected, FHA announced their increased loan limits for the coming year. Unlike conventional loans, the increase is not as dramatic.
Remember, FHA maximum loan amounts depend on the area where a home is being purchased. The maximum allowed amount in New York City would not be the same as rural Alabama. For metro Atlanta counties, the new limit will be $412,850 (up about 3% from 2020).
It is nice the FHA loan limit went up for the coming year, but we didn’t see the same increase conventional loans got… FHA loans basically got a standard cost of living adjustment. Still some is better than nothing.
While home buyers can begin using the raised limits now, I think we can all say 2021 can’t get here fast enough!
Clay Jeffreys is a Mortgage Consultant with Dunwoody Mortgage Services and a writer for “the Mortgage Blog.” If you would like to be a guest writer for "the Mortgage Blog" please contact Clay for details.
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