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 a loan officer, I really like the Home Possible and Home Ready conventional loan programs. For eligible borrowers, these programs offer discounted interest rate pricing and discounted mortgage insurance premiums. To qualify, home buyers must make a down payment between 3% and 20% and complete an online homeownership class. Borrowers must also earn an income of 80% or less than the area median income for the census tract where they will buy a home.
I think these programs are such good deals that I have recommended (1) borrowers who planned to make a 20%+ down payment actually make less than a 20% down payment to qualify for the lower rate and (2) spouses or domestic partners put only one person on the loan application to keep income lower to qualify for the discounts (that’s perfectly legal and within guidelines, by the way!!) The discounts are especially powerful for people wanting to buy condominiums, as these programs allow the buyer to avoid the expensive “condominium price adjustment” in the interest rate calculation. The Mortgage Blog has covered these programs in the past.
So, what’s the good news? On July 12, Freddie Mac updated its Home Possible Eligibility Tool to reflect the new 2020 area median income limits issued by the Federal Housing Finance Agency (FIFA). Approximately 87% of counties will experience AMI increases in 2020. That means that more home buyers can now qualify for these great loan programs.
I checked the tool for some addresses in the Atlanta Metro Area. Before July 12, the Home Possible annual income limit in these areas was $63,360. Now the annual income limit is higher at $65,760. I also checked Fannie Mae’s Home Ready website and found the same adjustment. While the income increases are not huge, every little bit helps, right? Home buyers earning $64,000 to $65,000 now can take advantage of these great programs, whereas they could not before July 12.
I recently talked with a first-time home buyer. She said another lender suggested she get an FHA mortgage. I recommended that with her 740 credit score and qualifying income, the Home Ready / Home Possible programs would be much better for her. She could get a similar interest rate with a 3% down payment, and she could avoid the FHA up-front mortgage insurance, which would cost her over $4,500. She agreed with me.
Do you know someone who wants to buy their first home in Georgia? They need to find a mortgage lender who will explore all loan options to find the loan that best fits their own unique situation. Tell your friend or coworker to call me. I’ll make sure we structure the loan and their application to take advantage of the best loan program available.
Mortgage rates – already at near historic lows – continue to improve. Current interest rates are basically a full percentage point lower than this time last year. I’ve recently locked clients into rates lower than I’ve ever had the privilege of doing in my entire career as a loan officer.
What factors allow rates to continue improving? One key component is the continuing spread of Coronavirus and the fears related to this public health concern. In times of fear and uncertainty, investors typically move money to less-risky investments. Given the fear and uncertainty related to coronavirus, investors have recently been doing this very thing. Investors have been putting more money into US government bonds. This drives bond prices up and interest rates down. The US 10 Year bond trended upward from August 2019 until December. Since then, the interest rate on this bond has moved consistently downward.
Investors consider mortgage backed securities to have a risk profile similar to US government bonds, so mortgage interest rates have declined along with rates on government bonds. So mortgage rates now sit very close to historic lows.
How long will these low rates last? That requires a crystal ball and I don’t have one. If health officials can control the coronavirus spread and ease public concerns, perhaps rates will start moving higher again. But looming over the entire situation is the 2020 Presidential and Congressional elections, which could bring more uncertainty to offset any positive news on the coronavirus front.
The bottom line is this: Home owners who purchased or refinanced in 2017, 2018, or the first half of 2019 may have a great opportunity now to lower their interest rate by refinancing. And home owners with FHA loans a couple of years old may be able to refi to a conventional loan now and lower or eliminate their mortgage insurance premiums. Some of my clients have lowered their monthly payments by over $200 a month. One even lowered her payment by over $300 a month. Did I just describe you or a friend you know? If yes, call me (or tell your friend to call me) to discuss refinancing now, before rates start increasing. Don’t miss out on potentially large savings.
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 that everyone understands the basics of FHA and conventional loans, let’s do a buyer comparison. Both Jack and Diane want to purchase a $300,000 home. They both have $11,000 (3.7%) for the down payment and 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 $1,820.82. For a FHA loan, his payment would be $1,563.19. There’s no comparison. For Jack, the better deal is the FHA mortgage, even though it has the draw backs of the up-front mortgage insurance and the permanent monthly mortgage insurance payment.
With Diane’s 795 credit score, her monthly payment for a conventional loan would only be $1,582.61. Her FHA loan payment would be $1,542.47. In this case, Diane is also better off, at least initially, with the FHA loan. One thing to keep in mind is the MI premium. If Diane chooses the FHA loan, that premium is permanent (assuming Congress does not change the law). If she chooses the conventional loan, the insurance will eventually be cancelled, dropping her payment to $1,442. The key question for Diane is, “How long will you stay in the home?” If less than 5 years, Diane’s best bet is the FHA loan. If longer than 5 years, Diane may want to consider the conventional loan.
Notice the FHA payments for these examples. They differ by only about $21 even though the credit scores are drastically different (680 versus 795). This shows why FHA is better for those making a purchase with lower credit scores. The buyer doesn’t see as steep of an increase in their payment.
In the next blog post, we will make the same comparison with a 10% down payment.
Does your friend Scott talk about buying a house? Does he understand which loan program is best for him? If not, have Scott contact me. We Dunwoody Mortgage professionals understand the details of these mortgage programs, and we coach our buyers to make the best decision given their circumstances. Often, with a slight change to their home purchase situation (change of down payment, paying down a credit card balance, etc.), we can help our clients save money with a better interest rate or a lower mortgage insurance cost. Home buyers should consider all options before buying, and Dunwoody Mortgage offers the service and knowledge to help home buyers make the best decision possible.
Now let’s take a look at conventional mortgage details. (Click here to review FHA loan details. And here is a link to the Home Ready program changes.)
In general, conventional loans are less forgiving of credit issues than are FHA loans. Conventional loans require longer wait times after derogatory credit events like foreclosure or bankruptcy. And the borrower’s credit score has a much greater impact on conventional loan pricing versus FHA loans. The lower one’s credit score, the higher the interest rate. In some cases, a credit score 100 points lower could cause the borrower’s interest rate to increase by almost one percentage point.
Ultimately, this makes conventional mortgages less attractive to borrowers with lower credit scores and more attractive to those with higher credit scores.
Conventional loans do not require up-front mortgage insurance, but private mortgage insurance (“PMI”) is required for down payments less than 20%. PMI rates vary based on the borrower’s credit score and down payment. For the same loan amount, the monthly PMI will be dramatically different for a 690 credit score borrower making a 5% down payment vs. a 780 credit score borrower making a 15% down payment. PMI is not permanent. It automatically terminates when the borrower’s loan balance reaches 78% of the original contract price or appraised value (whichever is lower). And, in certain circumstances, the borrower can request PMI cancellation prior to reaching the 78% threshold.
Borrowers can obtain a conventional loan with a minimum 3% down payment. This often only makes sense when the borrower’s credit score is 720 or higher. With a lower score, the PMI cost for a 3% down loan can get pretty expensive. We often recommend that conventional buyers make a 5% or more down payment to keep PMI costs lower.
Another advantage of conventional loans is the maximum loan amount. While FHA caps out at a purchase price of around $390,000 using the minimum down payment, conventional loans can go higher. How much higher? How about a $500,000 purchase price with a 3% down payment. That is about 25% higher than the FHA maximum.
In the next posts, we will compare some hypothetical home buyer scenarios to determine which loan is best – conventional or FHA. Do you know someone who wants to buy a Georgia home? Please refer them to me. We Dunwoody Mortgage professionals ask important questions to determine if we can help our clients make slight changes (down payment amount, paying down a credit card balance, etc.) that help them save money with a better interest rate and / or lower PMI premium. We work hard to deliver excellent service and pricing to our customers, and our consistently positive reviews show our clients are pleased with our work.
Given recent mortgage program changes, now is a good time to review the pros and cons of the major loan programs and when borrower circumstances favor one specific loan program. In the last few years, many of our clients have used the conventional Home Ready program. Without Home Ready, many of these buyers would have used FHA loans. Given the Home Ready changes, we expect more future buyers to use FHA loans.
So let’s talk about FHA loans!
In the metro-Atlanta area, buyers can purchase homes up to about $390,000 using a minimum down payment (3.5%) FHA loan. That is a lot of home!
Relative to conventional mortgages, FHA loans are generally more forgiving of credit “issues.” This means lower credit score borrowers will most likely get a better FHA interest rate versus a conventional loan.
FHA allows for lower credit scores and shorter wait times following derogatory credit events, such as foreclosure or bankruptcy. Borrowers typically need a 620 score to qualify. Depending on other borrower details, Dunwoody Mortgage may be able to close loans where the borrower’s credit score is as low as 580.
Both FHA and conventional loans require monthly mortgage insurance “MI” for down payments less than 20%. For FHA, the monthly premium is a flat 0.85% of the loan amount. Conventional loans determine the premium based on the borrower’s credit score and down payment. FHA loans also have an up-front mortgage insurance premium. FHA monthly MI is permanent if the down payment is less than 10%. Note that Congress is now considering a bill to automatically cancel FHA MI similar to how conventional loans cancel the insurance. More to come on this story.
In the next post, we will review conventional loan details. For now, if you know someone looking to buy a Georgia home, please refer them to me. We Dunwoody Mortgage professionals understand the key loan program details and we coach our buyers to make the best decision given their circumstances. We can help our clients find ways to lower interest and mortgage insurance costs. We have a strong record full of very positive customer reviews.
As recently reported in The Mortgage Blog, mortgage interest rates have dropped to their lowest level in over two years. The last time rates were consistently this low was just before the 2016 Presidential election. For people who purchased homes since then, it may make sense to refinance now. So how do you decide if a refinance is right for you?
I read one article from a major think tank stating you should refinance for a rate that is a specific amount lower than your current rate. I believe that is a bit simplistic and you should crunch numbers in more detail. I recommend comparing the financial benefits against the cost of refinancing – the total amount you can save each month versus the refinance cost.
With a rate / term refi, you will save by lowering your monthly interest payments and, possibly, by lowering or eliminating private mortgage insurance (PMI) payments. I recommend you focus on the dollar savings. A 0.5% interest rate change on a $100,000 loan will save you much less per month than the same interest rate change on a $400,000 mortgage. Eliminating or reducing PMI payments can provide significantly lower monthly payments. To eliminate PMI, you must must have 20% equity. Perhaps your home’s value has increased since you bought it. You can capture this higher value as equity in the new loan using a new appraisal value. If the appraisal shows you have greater equity, even if it’s less than 20%, you may see your PMI payment reduced, perhaps substantially.
How do I analyze the savings? I estimate a new monthly payment based on the lower interest rate and potential PMI changes and compare this rate versus their current payment. Then I divide the refi closing cost by the monthly savings to get a “break even” point. If the monthly savings break even on the closing costs in three years or less, I typically recommend that the client pursue the refinance. Why three years? It seems most people have a general idea of their plans for the next three years or so. Anything further than that becomes a little murkier. I’m currently working with a client who has a $335,000 loan. I estimate a refinance will save her $150 per month and will “break even” in about 22 months. That seems like a wise financial move to me.
Another option to consider is a cash out refinance. Is there a home project you want to do? Perhaps a kitchen or bathroom renovation? I have clients using their home equity and lower interest rates to take cash out for a project, and still have the same payment (or even a better payment) than they have now.
Do you know someone who bought a Georgia home in 2017 or 2018? Ask them what they would do with an extra $100 per month. Then refer them to me. I’ll run the numbers to determine whether refinancing is a wise move.
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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