On April 9, 2012, FHA mortgage insurance premiums (both upfront and monthly) will increase to replenish their depleted accounts.
Although FHA interest rates continue to remain at all-time lows, FHA mortgage fees are increasing making the cost of buying a home or refinancing a home more expensive. The consecutive increase in FHA mortgage insurance premiums may limit a home buyers “buying power” but protects the nations top “low cost” mortgage option for homebuyers and “equity poor homeowners.
There was a great article in the Washington Post explaining the current financial situation of FHA if you are interested in learning more – Washington Post FHA Bailout.
Who Will This Impact the Most?
One of the main benefits of using a FHA loan to purchase a home is the low down payment requirement. Essentially, first-time homebuyers will be impacted the most, homebuyers that have less than 20% down payment to purchase a home. It’s important to know that FHA doesn’t fund mortgages, they simply insure mortgages that mortgage bankers like myself fund at the bank.
To better understand why FHA needs to raise their mortgage insurance premium fees, consider this –
Currently, a homebuyer can qualify for a FHA mortgage in Washington State with a 640 credit score, 3.5% down payment, and no money/assets in reserves (meaning you can even receive gift funds for your down payment). So as you can see, the risk for repayment primarily falls on the shoulders of FHA for the first 5 years, until home equity is typically achieved.
The New FHA Mortgage Insurance – How Does It Affect the Borrower?
FHA covers the above-mentioned low-down payment “risks” by charging an upfront mortgage insurance premium fee along with a monthly mortgage insurance fee.
Currently, homebuyers pay an upfront mortgage insurance fee of 1% (of the loan amount) and a monthly premium of 1.15%.
Under the new FHA increase in mortgage insurance, borrowers financing a home under $417,000, will pay an upfront mortgage insurance fee of 1.75% and a monthly fee of 1.25%.
For loan amounts over $417,000 (and up to $567,500), borrowers will pay an upfront mortgage insurance fee of 1.75% and a monthly fee of 1.50%.
A comparison – Let’s look at a $200,000 mortgage
– Old FHA Upfront Mortgage Insurance Premium: $1,930
– New FHA Upfront Mortgage Insurance Premium: $3,377
– Old FHA Monthly Mortgage Insurance Premium: $187/month
– New FHA Monthly Mortgage Insurance Premium: $219/month
How To Avoid the Costly Increase to FHA
If your credit score is over 680, then you may be eligible for a conventional, 5% Fannie Mae backed mortgage. Considering the above-mentioned $200,000 scenario, you could save approximately $63/month and eliminate the upfront mortgage insurance premium.
If you are a first-time homebuyer, I would also recommend looking into the Washington State USDA Home Loan. This loan program offers a zero down option with a low monthly mortgage insurance premium fee.
Please feel free to contact me directly at (425) 350-7136 if you may have any questions or would like a rate quote on a FHA, USDA or Fannie Mae backed mortgage.
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Dan Keller – Seattle FHA Mortgage Banker