It’s getting hard to keep up with the legislatures as they decide what is and isn’t ok for FHA loans. The most recent update is to the up-front mortgage insurance.
At the end of this, I’ve included a short primer for understanding FHA Mortgage insurance.
I recently wrote to you all about a risk based pricing model that adjusted the cost of the up front insurance on an FHA loan based on the credit score and the loan to value ratio. Our legislative bodies have now decided that a “one year moratorium” needs to be placed on this concept.
They have opted to change the up front insurance to 1.75% for all borrowers. If you recall, the previous level was 1.5%, so the net change here is that all borrowers now pay .25% more in up front mortgage insurance. If you look at the chart from the old premiums, you’ll see that this is the same or an increase from the recent changes for many borrowers and a decrease for only a few. With more well qualified borrowers taking FHA loans, this feels to me like a penalty to them (as much as a half point more in cost now).
- If you have clients that are well qualified and will possibly be going the FHA route, please have them call me now. I will have their FHA case number assigned which, if done before October 1st, will lock them in to the lower premiums even if they don’t buy a home for several months.
- If you have customers with lower scores, we will be advising them to hold off on having the case number assigned until after October 1st as it will likely save them money (of course we can still pre-approve them and they can even go under contract in the meantime).
Mortgage insurance primer:
There are 2 types of insurance that a home owner pays when they finance a purchase or refinance using an FHA loan; upfront and monthly.
- The upfront is an amount (as explained above now 1.75% for all borrowers) that is added to the balance of a loan and is financed into the loan and monthly payments without effecting the loan to value. This effectively means that if you put 3% down, you actually only have 1.25% equity the day you buy the house.
- The monthly amount is smaller and is a percentage of the loan amount divided by 12 and tacked onto each payment. Most borrowers will pay .50 percent (.005 x loan amount/12) if the LTV is less than or equal to 95 percent. For LTVs above 95 percent, annual premiums will be .55 percent of the loan aount. Borrowers of 15 year loans will pay no annual premium if the LTV is less than or equal to 90 percent, and .25 percent if the LTV exceeds 90 percent.
--Keith
**If you know someone else who would benefit from these updates, please pass this link on to them http://www.realestatemortgagenews.com
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