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For the longest time homebuyers have relied on FHA loans to obtain mortgages using just 3.5% down. These government-backed loans have historically helped borrowers that otherwise might have had a hard time getting a loan to become homeowners. All FHA loans require the borrower to pay Private Mortgage Insurance, a premium paid each month by the buyer to insure the lender against default. FHA covers the insurance.
In light of financial troubles and exhausted reserves, the FHA recently announced that it would be changing its program. The two biggest changes have to do with the amount of premium due each month as well as the length of time these premiums are due.
Increased PMI Premiums To Take Effect April 1, 2013
Right now, all borrowers that put less than 20% down on their FHA loan are expected to pay 1.25% of the loan amount each month but effective April 1 of this year, the monthly premium amount goes up to 1.35%. On a $200,000 home that increase amounts to about $17 each month.
PMI To Be Charged for the Life of the Loan For Minimum Down Payment Borrowers
PMI To Be Charged for the Life of the Loan For Minimum Down Payment Borrowers
The second change will have a lot more impact on borrowers. As of right now, all FHA loan holders are required to pay PMI until they either have 22% equity on their home or for the first five years of the loan (with a minimum PMI payment period of 5 years). As of June 3rd 2013, borrowers that put less than 10% down will be required to pay PMI for the life of the loan. Furthermore, if borrowers do pay 10% down, they would have to continue with PMI for at least a minimum of 11 years.
Buyers Must Be Under Contract By March 25, 2013 To Avoid Lifetime PMI
Buyers Must Be Under Contract By March 25, 2013 To Avoid Lifetime PMI
The mortgage industry expects a flood of new FHA applications, especially prior to April 1st since for FHA loans that have a case # assigned by April 1st, the lifetime PMI change will not apply. What this means to you as a buyer is that you should aim to be under contract by March 25th so that you can get your FHA case # back by April 1st. This does not mean that you need to close on your loan prior to April 1st of this year.
Conventional Loans Will Likely Become More Popular
Conventional Loans Will Likely Become More Popular
With these adjustments to the program, conventional loans will likely become more popular. Consider this comparison of a FHA loan with a conventional on a home priced at $200,000, once the changes have taken place:
Type of Loan
|
Down Payment
|
Monthly Mortgage Insurance
|
FHA
|
$7,000
|
$220
|
Conventional
|
$10,000
|
$113
|
Looking at the above example, there would be a savings of $1,300 each year by opting for a conventional loan.
Changes Being Made to Rebuild FHAs Financial Reserves
Changes Being Made to Rebuild FHAs Financial Reserves
There are two reasons for these changes. First, the FHA is trying to recover its reserve and second, the organization expects to reduce the number of FHA loans it insures with the expectation that more borrowers will turn to conventional loans.
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If you would like to find out more about this, or better yet if you want to avoid having to pay month after month for the life of your FHA loan, contact us today and we will help you find your new home. Don’t wait – this one is huge.
