Considering financing your home utilizing an FHA mortgage? Many home buyers have contemplated whether or not FHA financing represents a good option for them. Traditionally, these government backed loans have made it possible for buyers with lower incomes and/or credit scores to purchase a home. FHA allows buyers to put down as little at 3.5% on their purchase; however, because of the low down payment, mortgage insurance is almost always required. Homeowners with an FHA mortgage have historically been allowed to cancel their mortgage insurance premiums once the outstanding principal balance of the loan reached 78% of the original balance – this will no longer be the case. Beginning on June 3rd, homeowners with loans with a starting balance higher than 90% of the property’s appraised value will be required to pay mortgage insurance premiums for the life of the loan. If the LTV or loan to value ratio starts at 90% or less of the original balance, the borrower will be required to pay insurance premiums for a minimum of 11 years, even if the loan drops under 78% of its original balance.
The FHA is also taking it a step further and raising mortgage insurance rates on loans endorsed on or after April 1, 2013. Premiums are being raised on most loans by $100 or a 0.10 percentage point for every $100,000. For jumbo loans (loans more than $625,000) with terms longer than 15 years, premiums are being increased by $50 or a 0.05 percentage point for every $100,000. These premium increases will not apply to homeowners refinancing their property with an existing FHA loan endorsed on or before May 31, 2009.
Let’s walk through a hypothetical scenario where a borrower secures a 30 year FHA mortgage for $500,000. After June 3rd this borrower would pay an additional $500 per month in insurance premiums above what is presently required by FHA. This equates to an additional $180,000 paid over the life of the loan.
Why the changes? The FHA’s reserves are in the red as a result of the bad loans made during the housing crisis. Now today’s borrowers are paying the price, literally. For those in the market to purchase a home now that have good credit and are coming from a strong financial position conventional loans may offer better options.