Posts Tagged ‘FHA mortgage insurance’

FHA loans are back!

July 21, 2015

blog-author-clayjeffreys3

President Obama issued an executive order that reduced the monthly mortgage insurance premium on FHA loans by more than a third. This order started in January. Since then, FHA loan applications rose dramatically. From February through May of this year, the number of FHA loans essentially doubled from the same time period in 2014.

Why all the love for FHA loans? Because the total monthly payment is more competitive now with conventional loans. Prior to the change, home buyers with excellent credit would see monthly mortgage insurance rates 2.5 times higher for FHA loans than conventional loans. Since the change, FHA monthly mortgage insurance is still more expensive, but nowhere near as bad as it was before the executive order.

In fact, I’ve been able to recommend FHA loans again to my clients. What I mean by that is this… prior to Obama’s executive order, the FHA mortgage insurance was so much higher, it made the total monthly payment for FHA uncompetitive to that of conventional loans. Only clients needing a down payment as low as 3.5% or had credit scores under 660 would really consider using FHA loans.

Now the total monthly payments are more balanced, and you see that by the amount of FHA loan applications now being processed. Here is a brief break down of FHA vs. Conventional loans on a decision making basis using credit scores.

  • those with excellent credit will still likely go with a conventional loan even though the interest rate is better on an FHA because mortgage insurance is not permanent (FHA loans can be), and there is no upfront mortgage insurance payment due at closing (FHA requires this).
  • those with average credit could go either way. It really depends on the exact credit score and the rate difference. Remember, the rate for FHA loans are better than conventional, so even though the monthly mortgage insurance could be higher (and permanent, more on this in a minute), the total payment could be basically the same when you take the interest rate difference into consideration.
  • those with below average credit scores tend to go FHA now. Why? The interest rate is much higher on a conventional loan than FHA loans for lower credit scores. Also, the monthly mortgage insurance payment is higher for conventional loans once credit scores go below 680.

The big drawback to FHA loans is that the mortgage insurance can be permanent. That said, under the “old guidelines”, it would take over 11 years of regular, on time payments before mortgage insurance on FHA loans would fall off. Since most people move on average every 7  years, the mortgage insurance would be on the loan the entire time – so “permanent” isn’t as scary as it sounds.

Don’t know if an FHA loan is right for you? If you are buying in the state of Georgia, contact me. We can talk about your situation and decide what loan is right for you and get you into your new home!

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FHA 203k Streamline

July 15, 2014

blog-author-clayjeffreys3

Over the past couple of months, I’ve closed a couple 203k streamline loans. I figured now is a good time to talk more about the program itself.

The 203k Streamline loan rehabilitation loan from FHA that allows a borrower (purchase or refinance) to put a little bit of “tender loving care” into a home that needs some updating. There are two versions of this loan. Let me talk about both so there is no confusion.

The first version is simply called the FHA 203k loan. There is no cap on the amount of work that can be done to the home (so long as the home appraises high enough). The borrower can also make structural changes to the home. This loan program takes a longer time to get through underwriting and may require multiple appraisals. This adds up to making it a 45-60 day closing time frame.

A quicker way is using the FHA 203k streamline program. The Streamline version has a cap on the amount of work that can be done. The program also requires a 10% contingency reserve in case the work goes over budget. The cap is $35,000, and 10% of that amount is $3,500. Since almost every one chooses to finance the 10% contingency reserve, that leaves roughly $31,500 for the renovations. Once the work is complete, any excess funds left over in the contingency reserve will be deducted from the loan amount.

The advantage of using the Streamline version is it allows for a quick closing time (around 30-40 days), and an easier time through underwriting. The main drawback is the cap on the amount of money that can be used for renovations.

Here are some bullet points about the FHA 203k Streamline:

  • allows up to $35,000 worth of work that can be done on the home (roughly $31,500 if financing the 10% contingency reserve)
  • the Streamline program allows for a variety of items to be repaired/replaced/updated (roof, windows, siding, flooring, fixtures, appliances, HVAC, etc.).
  • the Streamline program will not allow any structural changes to the home. This means walls cannot be taken out to open up the floor plan.
  • other allowable improvements can include mold remediation, lead-based paint stabilization, septic system repair/replacement
  • borrowers can choose to add exterior decks or patios
  • money can also be used to modify a home for persons with disabilities

As you can read, there are a lot of advantages and goals that can be accomplished using the 203k streamline loan. If you are buying a property in the state of Georgia, and would like to know more, contact me. We can talk about the details of the program and see if the FHA 203k Streamline loan will fit your needs.

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3% down going away (for now)

November 5, 2013

blog-author-clayjeffreys3

What does a dinosaur, a Dodo bird, and a 3% down payment conventional loan have in common? They are all extinct.

Beginning on November 16, 2013, conventional loans with a 3% down payment will go the way of the dinosaurs and no longer be available. And just like the dinosaurs in Jurassic Park, 3% down conventional loans will come back at some point in time. More on that in a moment.

For those wanting to take advantage of a 3% down conventional loan now, you need to be under contract and have the loan application process started prior to the 15th. You then need to be closed by the end of January 2014. If you meet both of those criteria, and qualify for the loan program, you can still use this program.

Why would someone want to use a 3% down conventional loan? There are several reasons actually:
1. the 3% down payment is less than the minimum down payment for FHA loans.
2. the monthly mortgage insurance payment is roughly 25% less each month for 3% down conventional versus FHA loans.
3. the monthly mortgage insurance is not permanent on conventional loans. FHA mortgage insurance is now permanent under most circumstances.
4. there is no upfront mortgage insurance premium rolled into the loan amount on conventional loans like there is on FHA loans.

As you can see, there are lots of advantages going with a 3% down conventional loan versus an FHA loan if you need a loan with a small down payment and have a qualifying credit score.

About 3% down payment loans coming back from extinction… this loan program has come and gone at least 3 separate times since the housing crisis. More than likely, it will come back again. I don’t know when it will come back, but my guess is it will take less time for 3% down conventional loans to reappear again that it did the Jurassic Park dinosaurs to come back.

If you are looking to buy a home and planned on using a 3% down conventional loan to buy that home, there is still time to use it. Contact me today, and we can get started and get you into that new home with only 3% down.

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Small down payment loan options

March 13, 2013

blog-author-clayjeffreys2
With yet another round of FHA mortgage insurance premium increases set to begin on April 1, 2013, many people think their only option of buying a home with a small down payment will just have to coincide with a ridiculously high monthly mortgage insurance payment.

What many people are not aware of is the fact that conventional loans have a program that requires only a 3% down payment. You will need a higher credit score than an FHA loan, but the down payment is actually smaller than an FHA loan. Also, you can get approved for conventional loans with as little as 5% down. Let’s talk these loan programs.

As we have recently discussed, FHA loans only require a 3.5% down payment. The drawback in the monthly mortgage insurance. Starting April 1st, all new FHA loans will have a 1.75% up front premium rolled into the loan amount. Also, the monthly mortgage insurance will increase to 1.35% of the loan amount. The mortgage insurance payments will be permanent unless you make a 10% down payment when you buy the home. The advantage of FHA loans is that your credit score can be as low as 640, but it comes at a cost of a REALLY high monthly mortgage insurance payment.

Conventional loans with 3% down do require higher credit score of 700, but you do get by with a smaller down payment. That isn’t the only thing that is smaller. The monthly mortgage insurance rate is only 1.15% of the loan amount. Also, there is NO upfront mortgage insurance premium rolled into the loan amount. If you have a qualifying credit score, this program comes with a smaller down payment, no upfront mortgage insurance premium, and a lower monthly mortgage insurance rate.

Conventional loans with 5% down only require a 660 credit score. The down payment is higher than an FHA loan, but again, there is no upfront mortgage insurance premium. Even with a 660 credit score, the monthly mortgage insurance will be less than an FHA loan. If you have a credit score in the 700s, the monthly mortgage insurance could be half as much as an FHA loan.

Whether you are a first time home buyer OR just someone looking to buy a home and need a small down payment, you have options other than an FHA loan. You can qualify for a conventional loan with as little as 3% or 5% down. In both cases, the monthly mortgage insurance will be less than an FHA loan. There is also no upfront mortgage insurance premium being rolled into the loan amount.

With all of the changes taking place to FHA loan, conventional loans are becoming more and more attractive. If you haven’t discussed a conventional loan with your mortgage broker, you should. If you are buying a home in the state of Georgia, contact me* and we can discuss it today!

* scroll down to the bottom of the page for my contact information

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FHA changes begin April 1st

February 12, 2013

blog-author-clayjeffreys2

As you may have heard OR read on this blog, FHA announced changes to their loans. Those changes take place on all case numbers assigned on or after April 1, 2013. Does this mean you need to be closed on a home by the end of March.

In the words of Lee Corso – not so fast my friend!

lee-corso

The changes that increase the monthly mortgage insurance rate AND make the mortgage insurance permanent are for all loans with case numbers assigned by April 1st. That doesn’t mean you need to be closed by that date. Ideally, you need to be under contract by Monday, March 25, 2013 so your lender can order your case number. Under this scenario, you should have a case number before April 1st.

Typically it takes 24-48 hours to get a case number back, but there could be a rush on case number orders due to the April 1st deadline. To ensure you get a case number assigned before April 1, 2013, be under contract by March 25th. Have your lender order the case number ASAP, and you should have it back by the end of the week.

This means you don’t have to find a home and be closed in roughly 45 days from now. What it does mean is you have six weeks to get prequalified, find a home, make an offer, and get under contract. You can close after April 1st and still get the current mortgage insurance terms and guidelines for your FHA loan.

Looking to buy a home in the state of Georgia? Contact me today, and I can help y0u get started with the prequalification process.

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FHA changes officially announced

January 31, 2013

blog-author-clayjeffreys2

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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Why the MI increase on FHA loans?

October 2, 2012

Since my last post, I’ve received a few emails inquiring why FHA continues to increase the mortgage insurance on their loans. Does FHA even want to lend money anymore?!? I’ve blogged about some of the reasons for the changes in a few posts over the past year. Here is a consolidated version of those posts for easy reading.

  • First and foremost, FHA is running out of money. They are at the lowest point ever in their history, and it isn’t getting better. Since FHA fully guarantees the loans they issue, with all of the foreclosures, the “bank” is running out of money. FHA has always been self funded. Given the current state of the federal budget in D.C., now isn’t the time to look for a handout. So they will raise money the only way they know how – by increasing the monthly mortgage insurance premiums.
  • FHA wants to go back to being the niche program they were AND designed to be in the mortgage industry. Prior to the housing burst, FHA made up less than 10% of the originated mortgages. During the past few years, they have climbed to as much as 50% of the loans being originated. FHA never intended their loans to be used in this way. By increasing the monthly mortgage insurance, it makes conventional loans with 3% or 5% down look much more appealing.
  • Eventually, the government wants private lenders to begin working their way into the mortgage industry. If the monthly mortgage insurance is raised to 2.05% (up from its current 1.25%), at some point other companies will come in and say “we’ll do that deal, but only charge 1.50% annually on mortgage insurance…” or something along those lines. Ideally, this would happen to FHA and conventional loans so the government doesn’t have to keep backing Fannie and Freddie either. At this point, we are a long way from this taking place. That said, could this be the start of moving the mortgage industry in that direction?

While there are a few reasons for the increase, the most pressing reason is the lack of money to fund FHA. If they run out of money, then FHA loans go away entirely. While the government would like to see the number of newly originated FHA loans decrease, having FHA eliminated all together isn’t their goal. By increasing the monthly mortgage insurance, it should increase the money coming into FHA’s coffers while probably reducing the number of buyers using FHA loans to purchase their home.

Hopefully this post has shed some light on why FHA has annually increased their monthly mortgage insurance.

Another increase to FHA mortgage insurance?

September 20, 2012

You know FHA mortgage insurance is high when the monthly premium and mortgage rates are both in the 2’s! Yes, that is right. FHA mortgage insurance premiums may increase again. I say “may” because we do not know for sure whether or not they will be increased. What we do know is that Congress approved a measure that will allow FHA to charge up to 2.05% for their annual mortgage insurance premiums.

Is 2.05% annually a lot? Yes, yes it is. That would be about double the cost of monthly mortgage insurance for conventional loans with 3% down (that program carries the highest mortgage insurance rates for conventional loans). It would also be the largest one time increase in the last several years. Here is a quick review of FHA mortgage insurance rates over the past few years using a $200,000 loan for comparison:

  • in 2008, the annual mortgage insurance rate was 0.50%, or $83 per month
  • in 2009, it increased to 0.55%, or $92 per month
  • in 2010, the increase went to 0.90%, or $150 per month
  • in 2011, mortgage insurance increased again to 1.10%, or $183 per month
  • the last increase was in 2012 when it jumped to 1.25%, or $208 per month

Just to put that into perspective, the monthly mortgage insurance in 2008 was $83 per month. For the same loan amount, it is now $208 per month. That is an increase of $125 per month.

What does 2.05% look like? For a 200,000 loan, the FHA monthly mortgage insurance would be $341 per month! Also, the latest act of Congress requires a minimum amount of 0.55% for FHA loans. Homeowners who bought a home with a 15 year fixed mortgage and a 22% down payment were exempt from the monthly mortgage insurance. This may no longer be the case.

Again, I’ve used the word “may” several times in this post because nothing is written in stone. All Congress has done is said that FHA can choose to increase mortgage insurance rates to 2.05% and establish a minimum on all FHA loans. As of this post, nothing has been officially announced.

What should you do? If you were thinking of buying a new home using an FHA loan, it would be a very, very good idea to buy that home prior to any additional changes taking place to the monthly mortgage insurance. With an annual increase each year for the past four years, one thing we know for sure is that FHA will increase it. The question is “when”, not “if.”

Looking to buy in the state of Georgia? If so, I’d be glad to help you get prequalified and ready to make an offer. Contact me today to get started!

Even more changes to FHA loans

March 6, 2012

In my previous post, we discussed an FHA change that is soon to be implemented. There are a couple more being proposed or recently approved, which include:

  • Reducing seller contributions to closing costs: FHA guidelines allow for a seller to give up to 6% of the purchase price toward closing costs (lender fees, attorney fees, etc.) and prepaid items (setting up escrow account, home insurance, etc.). The seller cannot give any money toward the down payment. So even if the seller were willing to give the full 6% to the buyer, there has to be enough closing costs and prepaids to cover the contribution OR it goes back to the seller.

With today’s guidelines, even on a smaller purchase price, 6% would be enough to cover the closing costs and possibly some (or perhaps all) of the prepaid items. The proposed change would limit seller contribution to the greater of 3% of the purchase price OR $6,000. This sounds scary, but let’s look at the numbers.

If you take the greater of the two, then the minimum is $6,000. That is enough to cover closing costs and some of the prepaid items on the smaller loan amounts and the same can be said on purchases all the way to $200,000. Once we pass a purchase price of $200,000, then the seller contribution will go above $6,000. Once we get past this point, the numbers get even better.

For example, a purchase price of $250,000 gets you $7,500 toward closing costs/prepaid items. Again, this is enough to cover all closing costs and most of the prepaids. At a purchase price of $300,000, now the buyer gets $9,000. That is enough to cover closing costs and possibly all of the prepaids.

Why is this being made into a big deal? In states that have higher closing cost, this is going to make it more difficult for buyers with fewer assets to qualify for an FHA loan. In states such as Georgia, the impact will be miniscule.

  • Increase the up front mortgage insurance: for the first time in the history of FHA, there is a projected deficit in the mortgage insurance funds for FHA loans. This money is set aside to deal with foreclosures. With the slew of foreclosures over the past few years, the fund has dwindled. Once the fund is empty, FHA will have to ask the government for money in order to continue funding new loans. In addition to increasing the monthly mortgage insurance, FHA approved increasing the upfront mortgage insurance premium from 1% of the loan amount to 1.75% of the loan amount. This begins on all new loans date April 9, 2012 or later.

These are the items primarily being discussed. We know the upfront increase is approved, and as soon as a decision is made on the seller contribution, The Mortgage Blog will certainly update you!

In the meantime, how does this affect a potential buyer? From reading this post, you know the cost of getting an FHA loan is going to increase. If you need an FHA and are thinking of buying a home, go ahead and get the process started today. With the option of getting more money for contribution AND it costing less money from the mortgage insurance, FHA loans will only become less attractive in the coming months. If the property is in the state of Georgia, I can help get the ball rolling toward buying your new home!

FHA mortgage insurance increasing (again!)

March 1, 2012

It has been six months since we’ve seen a change to FHA guidelines, so we are LONG overdue! Starting April 9, 2012, the monthly premium on mortgage insurance for FHA loans will increase (again!). This will be the fourth increase in the past four years. Remember the premium was 0.50% of the loan amount* in 2008. Those days are long gone.

* to compute monthly mortgage insurance payments, you multiply the premium by the loan amount. For example, in 2008 you multiple 0.50% (or 0.005) by the loan amount. You then divide that number by 12 to get the monthly payment.

All new FHA loan applications on April 1st will have the monthly mortgage insurance premium increase to:

  • 1.25% for 30 year fixed loans with a 5% (or less) down payment
  • 1.20% for 30 year fixed loans with more than a 5% down payment
  • 0.60% for 15 year fixed loans with a 10% (or less) down payment
  • 0.35% for 15 year fixed loans with more than a 10% down payment

Did you see the jump on 30 year fixed mortgages over the past four years? The monthly mortgage insurance premium has increased 2.5 times since 2008! That means the monthly mortgage insurance for a $200,000 loan was only $83 per month in 2008. That same loan amount will now cost $208 per month in 2012. It is truly a staggering figure!

How does this impact people looking to buy a home now? The increase from the current level to the new level is modest. Using my same $200,000 loan amount, the current monthly mortgage insurance payment is $192 per month (1.15% of the loan amount). After the increase, it will be $208. Using this example, it will be $16 more per month. If you look at it solely from a numbers perspective, $16 more a month isn’t horrible.

What a prospective home buyer should take away from this is the cost of getting an FHA loan continues to rise. If you see the trend over the past four years, FHA loans are becoming more and more expensive each month. In fact, there are proposed changes that will continue to increase the cost of getting an FHA loan (more on that in my next post).

In the meantime, if you are looking to buy a home this year and need to use an FHA loan, now is the time to act. As you can see from the trends, the numbers will only get worse. If you are in the state of Georgia, I can help you get prequalified to buy a home. Contact me to get started!