FHA Loans Just Got More Expensive
FHA Is Changing...Yet Again
If you haven't been keeping up with all of the mortgage changes; please be aware that FHA (Federal Housing Administration) loans just gotten more expensive.
FHA has new rulesand regulations which make them more like conventional loans that are made by the banks and mortgage companies. They have increased the closing cost rules, changed the down payment structure for certain loans and now they are changing the monthly MIP (mortgage insurance premium) percentage amount. Sometimes called the annual MIP. All of these changes have been diagnosed as keeping FHA solvent. FHA has insured about 30% of all loans made and projected 1.7 million loans by the end of its physical year September 30 according to a quarterly report to congress.
What this means for first-time homebuyers. It means the cost will be higher, the credit must be better to get less down payment and less closing cost will be paid by the seller. It also means that the payment will be higher as the higher monthly MIP will be increasing. This is not the best new FHA could give which of course is backed by the government. This is why FHA loan have just gotten to be more expensive. Normally FHA has had the title of helping those borrowers who could not go conventional. Now the FHA product is beginning to be more and more like the conventional product. One difference is the 5% down payment but this has changed if the credit score is below the minimum requirement for FHA. FHA still has the 3.5% down payment for credit scores that are above 580; anything below 580 will push the down payment to 10%.
The higher monthly MIP is being raised to 1.5% of the base loan amount. It is said that FHA will then lower the upfront MIP to 1.00% as it was raised earlier this year to 2.25%. Some have said it equals to about a $44 increase in payment when all is washed between the two features.
Points to Ponder
The good news for FHA loans is the fact that there is not another product (meaning conventional product) FNMA/FHLMC, who will give a borrower a loan with a credit score of 580 and below period. Therefore, the 10% down payment for a loan with a credit score of 580 and below is not that bad. **Just for the record; I have read there are still subprime loans available which is not recommended by this previous mortgage underwriter and operations manager.
There is a higher delinquency rate with borrower's who have a credit score below 580; per the report to congress.
The seller contributions are being lowered to 3% which is right in line with conventional financing from the previous 6%. This in it's self is not all bad as this makes the sale price more normal.
My Advice To Prospective FHA Borrowers
What to do to get the best financing
- Clean up your credit and get your score up to standards. This gives you more suitable options in getting the best financing.
- Save your down payment from your own funds, meaning your income, sale of a marketable asset which can be documented, cash value of a life insurance policy, 401K vested funds etc. Do not expect to get a loan without any investment. It doesn't work any longer. You need your 3.5% down payment for FHA and 5% down payment for Conventional (conventional down payment cannot be gifted; it must be the borrower's documented own funds). FHA will allow the down payment to be gifted.
- Pay off as much debt as possible as it is to your advantage to have a debt to income ratio that is reasonable
Anytime the seller pays closing cost, it is added in your sale price making your loan amount higher and the value then must meet the higher sale price. This very used benefit/loss is a lot of what has casued the declining property values that are present now. Not a popular subject for the Real Estate Agent, but true, non the less. This is sometimes overlooked, left unsaid or written off as the usual. You are paying this loan amount for 30 years with interest. The more funds you have in the transaction/down payment...gives you more equity. This is true for all loans.
The seller IS NOT GIVING YOU ANYTHING when they pay the closing cost. They are raising the sale price to cover it and YOU ARE PAYING THE CLOSING COST OVER A 30 YEAR PERIOD.
It is always best to pay the closing cost on a refinance transaction out of pocket also as you are paying interest for the life of the loan on the entire amount and it will take you at least 2 years or more to pay the closing cost you have added into your loan.
The most advice anyone can receive regarding all loan products, especially with all of the changes going on in the housing market; is to be knowledgable. Read and read some more. Understand the closing cost you are being asked to pay. Read RESPA guidelines. Read any and all information given online with regard to the lender you choose to use. Make sure you understand the:
- product *type of financing
- terms *15, 20 or 30 yr
- interest rate * fixed rate or adjustable
- closing cost
- down payment
- first payment date
- seller paid cost
- mortgage insurance
Be informed...ask questions and then ask some more questions. It is the responsibility of the lending institution to help you understand the loan you are going to pay up to 30 years on.