FHA finally makes a change to mortgage insurance

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!

Appraiser requirements change for FHA loans

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.

More potential changes to FHA loans

I’ve thrown up a posts over the past couple of months (here and here) about potential changes for condo purchases using FHA loans. How about a change on FHA loans that is beneficial for everyone!

A new bill working its way through Congress would make mortgage insurance for FHA more like mortgage insurance for conventional loans.

Currently, FHA mortgage insurance is permanent unless the buyer makes a 10% down payment. When making a down payment as large as 10%, often buyers use a conventional loan. Maybe there is a case where someone still wants to do an FHA loan (for example, a foreclosure 3 years ago is OK on FHA loans but not OK for conventional loans), but often 10% down means a buyer is using a conventional loan for their purchase.

With FHA’s current permanent monthly mortgage insurance, it makes FHA loans much less competitive with conventional loans. The new bill looks to change this situation.

If passed, the bill would change the cancellation date on FHA mortgage insurance from “until the loan is paid in full” (meaning permanent for the life of the loan) to when the loan balance is 78% of the homes original value. Meaning, the mortgage insurance is no longer permanent.

The current set up with mortgage insurance on FHA loans really isn’t fair to the home buyer. They are way over charged paying mortgage insurance for the life of the loan, and the change could make FHA loans are more viable alternative for buyers making the minimum down payment on a home purchase.

Can’t decide if an FHA is right for you? Contact me and we’ll find out! If you are buying a home in the state of Georgia, I can also get you prequalified and ready to make an offer on your new home.

Government impact on housing

Sometimes the government gets involved in areas, and things get worse. Here is one area where inaction would be really bad – flood insurance.

On the last possible day, Congress avoided a lapse in the federal flood insurance program when the Senate voted to extend the program through the end of November. The National Flood Insurance Program would have expired July 31 without this action. So the program has been extended, but still doesn’t include any reforms to the program. Despite years of debate and proposals to reform the program, reforms have stalled. In lieu of any changes, Congress has kicked the can down the road another few months. We’ll get to do all of this again in a few months.

This isn’t a case of “they’ll do anything to prevent a lapse of flood insurance coverage.” Congress has let the national flood insurance program lapse some in the past few years. Here is hoping the next change/extension/reform won’t be at the very last minute, but something tells me it will be.

In other mortgage news from the government, it appears the current set up for FHA mortgage insurance will remain the same. There will be no decrease in the monthly premium AND the insurance will still be permanent for the life of the loan.  FHA’s insurance program works differently from private mortgage insurance, which typically falls off after a certain amount of time.

The FHA’s policy wasn’t always this way. The FHA’s previous policy required borrowers to pay mortgage insurance premiums until the outstanding principal balance reaches 78% of the original home value, but the FHA instituted the life of loan policy back in 2013. This action was part of the effort to improve the status of their mortgage insurance fund. While there were some good years of rebuilding the fund, the decline of the funds balance in 2017 caused FHA to pause in potential changes to mortgage insurance.

Currently, the mortgage insurance is so high on FHA loans that it rarely makes sense for a borrower to consider using an FHA loan unless they have really low credit and/or a very high debt threshold. Good credit, low debt, but short on the down payment? Conventional loans allow only a 3% down payment (compared to FHA’s 3.5% down payment). Hopefully FHA can update their mortgage insurance policy in the near future to provide more options for well qualified borrowers.

Looking to buy a home before the end of the year? Ready to have a new home for the holidays?!? If you are purchasing in Georgia, contact me today. I’ll get you ready to make an offer in one quick phone call.

Mortgage Insurance

Last time our videos focused on the monthly mortgage payment. Today, we will focus on something that could be part of a monthly mortgage payment – mortgage insurance. There are a lot of components that go into mortgage insurance. Watch the video to learn more about it!

To contact any of us at Dunwoody Mortgage Services, click here!

3% down going away (for now)

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.

FHA Exhausts Reserves

It finally happened… FHA and the Department of Housing and Urban Development are reporting their reserves are now exhausted with a loss coming at the end of the 2012 fiscal year. It was bad enough at the end of the 2011 fiscal year with reserves at just 0.24%. Now FHA is in the red. For the first time in FHA’s 78 year history, they may need a tax payer funded bailout.

How did this happen? When the financial crisis took hold in 2007-2008, subprime mortgages disappeared. Borrowers who could only qualify to buy a home using a subprime loan turned to FHA loans and their minimal qualifying standards. At the time, FHA had no credit score requirements and could use alternative forms of credit to qualify for the loan.

The increase in FHA loans was so dramatic, that many began to wonder if FHA loans were becomming the new subprime mortgage. I blogged about that possibility in the summer of 2008.

Fast forward a couple of years… with the increase in the number of FHA loans being originated coupled with the record number foreclosures, FHA was paying out way more than it was taking in from their mortgage insurance premiums. FHA knew this was coming and has worked to increase the amount of money coming in on the newly originated loans. FHA has increased the monthly mortgage insurance rate annually for the past several years, and looks like it will happen again soon.

FHA is currently saying a bailout may not be needed. Just because they do not have reserves doesn’t mean they don’t have the money to pay new claims OR that they need money from the government immediately. Until they need a bailout to continue to insure new loans, this isn’t a crisis… more of a concern. That said… the day could be coming.

Moving forward, it is only a matter of time before the monthly mortgage insurance rates go up again. If you are waiting to buy a home OR refinance an existing mortgage using an FHA loan, it would be good to get started now. Once FHA announces a start date for the increase in monthly mortgage insurance rates, there will be a rush to close on FHA loans under the current guidelines.

Avoid the rush by getting started today. If you are buying a home in the state of Georgia, I can help you get underway!

Even more changes to FHA loans

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!

3% down conventional loans are back!

It has been about two and a half years since a conventional loan was available in Georgia with less than a 5% down payment. Those days are gone with Fannie Mae now allowing the FLEX 97 loan program.

Borrowers looking to buy a home who didn’t have a 5% down payment, but great credit, had to go with an FHA loan. Now I’m not saying FHA is a bad program (it definitely isn’t), but it does have that pesky up front mortgage insurance fee that is rolled into the loan amount. Since the FLEX 97 program is back, borrowers only need 3% down to go with a conventional loan and can avoid paying the up front mortgage insurance required on FHA loans.

Outside of the standard documenting of income, assets, etc., to qualify for the FLEX 97 loan program, one needs to have:

• 3% down payment (FHA requires 3.5% down)
• credit score must be 700+
• purchase/refinance for primary residence only

Some of the advantages of using the FLEX 97 conventional program:

• only need 3% down
• no up front mortgage insurance premium required
• allows borrowers with 700+ credit to obtain a lower total monthly payment using FLEX 97 instead of an FHA loan
• loan amounts up to $417,000 instead of $346,250 (the max FHA loan amount for metro ATL counties)

As you can see, there are several advantages to using the FLEX 97 loan program for borrowers that qualify. Do you need to know if you qualify for this loan? If you are in Georgia, contact me and we’ll get started!

are the rumors true?

The past several years have brought so many changes to the mortgage and real estate industries, it is hard to keep track of everything. With that in mind, it is natural for rumors to get started.. “I heard one of the changes allows…” and you fill in the rest of the sentence.

What I would like to do with this post is discuss three of those “rumors” to see what is real and what is not.

#1. Conventional and FHA loan programs allow for hardship exceptions for individuals out of work in regards to  income requirements. This one is not real. With the ever tightening guidelines for both conventional and (especially) FHA loans,  income must be documented. The income could come from a variety of sources (job, alimony, child support, disability, commission, bonuses, social security, etc.), but it must exist in some form. Hardship exceptions are not allowed.

#2. I can make less than a 20% down payment and not pay mortgage insurance on a monthly basis. This one is true! Conventional loans have a program that allows the lender to make a one time fee payment to waive the monthly mortgage insurance. The catch? The fee is paid “by the lender” when you agree to take a higher interest rate. In short, you are still paying for it through a higher monthly mortgage payment. Bottom line, in most cases it is cheaper to go the lender paid route instead of the monthly route, but the loan still has an increased monthly payment because of the higher rate.

The better alternative – go with an FHA 15 year fixed mortgage. If a borrower puts 10% down OR has 10% equity in a refinance using a 15 year fixed FHA mortgage, there will be no monthly mortgage insurance payment. The catch? There isn’t one! There is no rate adjustment of any kind. The borrower will still be required to pay the 1% up front mortgage insurance premium fee (rolled into the loan amount), but that fee is required on all FHA loans regardless of the down payment amount.

#3. A no doc FHA loan is coming. This one is unknown at this time. These rumors began when some politicians asked the government to allow FHA to issue no doc loans so home owners can take advantage of the historically low interest rates. The catch? If this ever comes to fruition, it will be for refinances only. There would be no appraisal, no income documentation, no assets verified. As currently proposed, the home owner would only need to have owned the home for at least one year and NEVER missed a mortgage payment.

Why would the government consider doing this? Well, there isn’t a ton of risk involved with the loan. I know that sounds crazy, but hear me out. These loans would have an up front mortgage insurance payment, and probably a monthly requirement too. Also, the current home owner would have made at least 12 on time mortgage payments. Theoretically, if the home owner is already making their mortgage payments, wouldn’t they be able to consistently make a smaller monthly payment? Also, the hope is the monthly savings would be put back into the economy through consumer spending – which helps the economy. That is the real motivation… helping the economy.

Again, this is NOT a program that is available today. It may NEVER be available. I’m only writing about it today because some members of Congress have mentioned it, and I’ve received some emails from friends/clients asking about its validity.

Heard any other bits of news on mortgages that you are not sure if it is real or not? Feel free to contact me, and we’ll go through your rumor to find the truth!