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.
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.
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 discussed previously, using an FHA loan to buy a home makes sense for home buyers with relatively low credit scores and limited down payment funds. FHA loans offer very attractive pricing for these home buyers.
Interest rates have now fallen to their lowest level in three years, so it may be time for current FHA mortgage holders to consider a conventional mortgage refinance. The interest rate savings may not be huge, but changing from FHA mortgage insurance to private mortgage insurance could bring significant financial benefits.
I’m working with a couple now (we’ll call them Jack and Diane) who bought their home in 2017. At that time, their qualifying credit score was in the mid-600’s and they had just enough cash for the FHA minimum down payment. This was an ideal scenario for an FHA mortgage.
Fast forward to 2019 – their credit scores have increased and home appreciation in their neighborhood has given them more equity. A conventional loan now makes sense for their updated situation. They can refinance to a new interest rate that is just 0.25% less than their current rate. Normally such a small monthly savings, by itself, does not justify the cost of refinancing.
In addition to the interest rate savings, they will also save money every month with lower mortgage insurance payments. Switching from their FHA loan to a conventional loan will lower the mortgage insurance monthly premiums by about $120. Their total monthly savings equal $160, and their refinance has a break-even point of just over two years. Considering the interest rate savings plus the mortgage insurance savings makes their refinance worthwhile.
An added benefit is that their new private mortgage insurance will cancel in a few years (unlike the FHA insurance which is permanent), increasing their monthly savings to about $200. So, Jack and Diane will realize this bonus savings in just a few years.
Ultimately, home buyers who used an FHA loan two or three years ago may reap big rewards from a conventional refinance now, assuming their property value has increased.
Ron moved into your neighborhood in the last three years or so. At the neighborhood Halloween party, ask Ron if he has heard of an FHA mortgage. If he replies, “Yes, that’s the type of loan I have,” ask him if he would like to lower his monthly payment. Then connect Ron with me. We will quickly determine whether moving to a conventional mortgage can help Ron financially.
There are some interesting facts and observations in an August article documenting survey results from Millennial home buyers. Here’s a link to the full study from lendedu.com. 1,000 people aged 23 to 38 participated in the survey. Here are some survey results:
58% of respondents say they own their own home.
83% of these home owners obtained a mortgage to buy their home.
75% of these mortgage holders obtained a FHA loan.
16% is the average down payment percentage for the survey respondents.
To me, it is very surprising to me that such a high percentage of these home buyers used the FHA program, especially given the relatively high down payment percentage reported. What I also find surprising is how the author treats FHA loans vis a vis the private mortgage insurance component of conventional mortgages.
Let’s look at the basics of FHA mortgage insurance (“MI”) vs. conventional (private) mortgage insurance (“PMI”). FHA charges a 1.75% up-front MI. On a $300,000 loan, that charge is $5,250. Assuming a Millennial average 16% down payment, FHA charges a 0.80% monthly MI premium, which equals $200 per month. And for this loan, the borrower must pay the monthly MI for 11 years.
For PMI on conventional loans, there is no up-front fee. So our $300,000 mortgage holder is better off by $5,250 to start. The PMI premium is based on the combination of down payment and the borrower’s credit score. Let’s assume that a Millennial buyer (we’ll call her “Anna”) has a 680 credit score. I calculate Anna’s monthly PMI premium at 0.26% or $65 per month. In addition, the conventional loan PMI will cancel sooner than FHA MI, so Anna will pay conventional loan PMI for less than half the time she would pay FHA loan MI.
Summarizing this example, Anna with a 680 credit score would reap the following mortgage insurance benefits of choosing a conventional loan vs. FHA: (1) Anna saves $5,250 by not having the up-front FHA MI premium rolled into the loan amount; (2) Anna saves $135 per month with the lower PMI rate vs. the FHA MI rate; and (3) Anna stops making mortgage insurance payments way sooner. And Anna’s PMI payment will be even lower if her credit score is in the 700’s. From a mortgage insurance perspective, the conventional loan seems like a much better deal.
The author praises the use of FHA mortgages, then later makes the following statements about private mortgage insurance:
“PMI should be avoided as it will usually cost the homeowner between 0.5% to 1% of the full mortgage amount….”
“…it is not great that so many are also paying for PMI as a result of less-than-optimal down payments…”
Such blanket negative statements about PMI concern me. In our example, and many examples where the borrower has a strong credit score and can make a 10% or more down payment, the numbers often favor conventional loans. FHA loans are often better when the borrower’s credit score is low or the borrower can only make a down payment of 10% or less.
The key lesson here is to consult a professional mortgage lender (I suggest that this guy for Georgia home buyers) to run the numbers for both FHA and conventional loans. Then choose the best option given your circumstances.
Now let’s change our buyer scenario. Both Jack and Diane want to make offers on a home, but this time they have 10% to put down. (Curious about a smaller down payment? Take a look at the prior scenario with a 3.5% down payment.) They still have the same qualifying credit scores of 680 for Jack and 795 for Diane.
With Jack’s 680 credit score, his monthly payment for a conventional loan (principal, interest, and mortgage insurance “MI”) would be $1,514.30. For a FHA loan, his payment would be $1,452.29. Given Jack’s credit score – even with the 10% down payment – FHA still delivers a better price, even though FHA loans have the draw backs of the up-front MI and the permanent monthly MI (assuming Congress does not change the law).
In this scenario with Jack’s 10% down payment, the mortgage insurance falls off after 11 years (even if Congress doesn’t act). Meaning, the FHA loan becomes even more attractive now and into the future.
With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,391.24. Her FHA loan payment would be $1,452.29. (Note that it is the same as Jack’s payment, even though Diane’s credit score is over 100 points better.) In this case, Diane can now save money by using the conventional loan. The conventional loan has the best pricing from the beginning, and it provides the PMI cancellation benefits mentioned in the previous post.
With this example, one can definitely see how FHA loans do not have the same impact when it comes to the interest rate, mortgage insurance, and monthly payment versus conventional loans. Even with such a large gap between the credit scores (680 versus 795), the payment on the FHA loan is the same.
Ultimately, every client situation is unique. For some borrower circumstances (e.g., self-employed, buying a condo, high debt to income ratio, etc.), we may recommend one loan option because the buyer has a better chance to win approval, even if the payment winds up being slightly higher.
Do you know someone planning to buy a home in Georgia? If they have questions, connect them with me. I love helping people understand their mortgage options and helping them determine the best approach to financing a home purchase.
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.
busino
clayjeffreys
Rodney
vanpurser
The Mortgage Blog 