Monday, February 11, 2013

FHA Mortgage Changes

This is important news for both buyers and sellers!

The mortgage insurance is going up on April 1st and on June 3rd they are going to make the mortgage insurance premium stay for the life of the loan!

The increase in rates isn't as much of a shock to me as making the mortgage insurance stick around for the life of the loan. This means that even if you have paid down the loan to 50% of the value of the house, you are still going to be paying 1.35% of the original loan amount every year for mortgage insurance. Over the 30 year life of the loan this will add up to a huge amount of money. For every $100,000 of loan a buyer will be paying $112.50 per month or $1,350 per year in mortgage insurance. That adds up to $40,500 over a 30 year loan, just for the mortgage insurance! And that is for every $100,000 in loan value, so a $300,000 loan would now cost you an extra $121,500 over the life of the loan.

You can refinance out of the loan at a later date, but right now interest rates are at a record low. Who knows where they will be when you are ready to refinance out of this FHA loan.

It should be obvious why this should matter to a buyer. If they are purchasing a home with an FHA loan, they need to do it quickly to avoid the increase in mortgage insurance and the mortgage insurance for the life of the loan.

For a seller, there are less obvious reasons that this is important to them. Obviously, if they are going to sell one house and buy another one with an FHA loan they will need to move very quickly. But here is the less obvious impact to sellers. As more buyers hear about this impending shift in the cost of their FHA loan and the date looms closer, they will start to feel even more pressure to get a home under contract. The article below suggests that if a buyer wants to avoid the increase, they should be under contract by March 25th. If this follows a similar pattern of the federal tax credit that ended on April 31st 2010 then buyers will pick over the inventory leading up to this date and prices will get pushed up. By the last few weeks it was a bit of a feeding frenzy.

Now, I don't expect it to be quite as crazy as it was in April 2010 but I do expect it to have an impact leading up to the April 1st date as well as the June 3rd date. Then again, even though the dates are split two months apart we have been suffering with a very low level of inventory in the market for over a year now. This might create a frenzy of activity, especially in the first time buyers market and the mid level move up market. I would expect to see a lot of pressure for any homes under the $500,000 price range. If a seller is thinking about selling in this price range, listing by March 15th would be a good plan. Listing after June 3rd might have their home entering a market where many of the summer buyers were pulled forward into the spring months and their property is now at a disadvantage.

I not big on trying to "time the market" but I do think it is my responsibility to take notice of the big items that might have a financial impact for my clients.

Here is the article that inspired my post:

FHA mortgage premium to rise on April 1
Borrowers who want to get a mortgage insured by the Federal Housing Administration should act quickly to avoid changes the agency is making to shore up its faltering insurance fund.

The U.S. Department of Housing and Administration announced the changes on Wednesday but didn't announce the effective dates until Thursday.

Here's the timing: FHA will raise the annual mortgage insurance premium on most loans that have a case number starting April 1 or later. To get a case number before the April 1 deadline and avoid the increase, borrowers should apply with a lender no later than March 25, says Julian Hebron, vice president with RPM Mortgage in San Francisco.

On most FHA loans, the annual premium will increase by 0.10 percentage point, or $100 per year for each $100,000 in loan amount.

For loans greater than $625,000 with a term longer than 15 years, the increase will be 0.05 percentage point, or $50 per year for each $100,000 in loan amount.

The premium itself varies depending on the loan size, term and loan-to-value ratio, but here's an example:

For a $500,000, 30-year loan with a loan-to-value ratio greater than 95 percent, the new premium will be 1.35 percent, or $6,750 per year, up from 1.25 percent, or $6,250 per year. On a monthly basis, the premium increase amounts to about $42.

For a chart showing premiums increases for various loan types, check out Hebron's blog at These premium increases do not apply if a borrower refinances an existing FHA loan that was endorsed on or before May 31, 2009, into a new FHA loan under the streamline refinancing program.

FHA is not changing the one-time premium borrowers pay up front; it remains at 1.75 percent of the loan amount.

Bigger hit

In a potentially bigger hit, FHA borrowers will have to continue paying annual mortgage insurance premiums for a longer period of time - in most cases for the life of the loan.
This change will apply to new loans with case numbers starting June 3. To avoid this change, borrowers should try to apply by May 24, Hebron says.

In the past, FHA automatically canceled mortgage insurance on most loans when a borrower, anytime after five years, had made enough payments to reduce the balance to 78 percent of the original loan amount.

A borrower taking out a 30-year loan with 10 percent down could usually eliminate mortgage insurance after about six years making normal payments, or after five years if they made extra principal payments, Hebron says.

(If the original loan term was 15 years or less, the five-year rule didn't apply; FHA would cancel the insurance when the balance dropped to 78 percent.)

In the future, if the borrower starts off with a loan-to-value ratio above 90 percent, FHA will collect the premium for the life of the loan. If the original ratio is between 78 and 90 percent, FHA will cancel the premium if the balance drops below 78 percent of the original loan amount anytime after 11 years.

FHA mortgage premium to rise on April 1

Here is the link to the full article:

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