Several weeks ago, President Obama signed a law giving the Department of Housing and Urban Development (HUD) the ability to make changes to the mortgage insurance on all FHA loans. While the law allows HUD to increase the mortgage insurance almost three times higher than its current level, it wasn't until recently that the exact changes were known for the different FHA loan programs.
In the next few paragraphs, I aim to address those differences, provide some examples and insight into how this impacts individuals looking to buy or refinance a home using an FHA loan for all new case numbers assigned on October 4, 2010.
For all FHA loans, the up front mortgage insurance premium is being reduced from 2.25% to 1.00%, and the up front premium can still be rolled into the loan amount. Now, instead of an additional $4,500 being added into the loan on a $200,000 loan, that up front premium is now only $2,000. That is great news for everyone!
For FHA loans equal to or less than 15 years, the only real change starting on October 4, 2010 is the previously discussed reduction in the up front mortgage insurance premium. The monthly mortgage insurance premium for 15 year FHA loans with less than a 10% down payment (less than 10% equity for a refinance) remains at 0.25% with no monthly mortgage insurance for individuals putting more than 10% down (10%+ equity for a refinance).
The noticeable change takes place for all FHA loans greater than 15 years; in other words, the 30 year loan. The reduced up front premium obviously applies, but the monthly mortgage insurance premium will increase from 0.55% to 0.90% for loans with less than a 5% down payment (0.85% for loans with more than 5% down). Since most individuals using an FHA loan choose to go with the minimum down payment, let's focus on the new monthly premium at 0.90%.
Let's say you are buying a home using a 30 year fixed FHA loan. The purchase price is $250,000, and you are putting down the minimum down payment of 3.5%.
- under the old scenario (2.25% up front & 0.55% monthly), the total loan amount would be $246,678 and the monthly principal, interest, and mortgage insurance payment at 4.500% would be $1360 ($1250 and $110 for mortgage insurance).
- under the new scenario (1.00% up front & 0.90% monthly), the total loan amount would be $243,662 and the monthly principal, interest, and mortgage insurance payment at 4.500% would be $1415 ($1235 and $180 for mortgage insurance).
What are some of the noticeable differences:
- the loan amount along with the principal and interest payment is lower under the new mortgage insurance guidelines
- the monthly mortgage insurance is now significantly higher
- the total monthly payment is higher, not significantly, but higher nonetheless
We've read the changes and looked at an example. Now let's evaluate the potential impact of the changes:
- Regardless of using an FHA loan for a purchase or refinance, individuals with a lower debt to income ratio will hardly notice a difference at all. There is an increase on the total monthly payment, but roughly only 4% higher than the current set up.
- the change will likely impact individuals yet to be prequalified or previously prequalified under the old mortgage insurance guidelines who have a higher debt to income ratio. Examples could include:
- first time home buyers just entering the work force
- someone who just changed to a new job
- someone who recently had their rate of pay/type of pay changed (for example moving from salary to base + commission)
- families with one income
- higher consumer debt
- not much credit card debt, but has student loans, car loans, etc.
As always, the key to making sure all is well is planning ahead. If you fit into one of those examples OR if it has been a while since you spoke with a mortgage consultant about getting prequalified, give me a call. I'd enjoy the chance to sit down and learn more about you, your situation, and ensure the FHA mortgage insurance changes do not hamper your ability to buy or refinance a home.
Clay Jeffreys is a Mortgage Consultant (LO#211998) with Dunwoody Mortgage Services, Inc. (NMLS# 158655, GA Residential Mortgage license #18158). Dunwoody Mortgage Services seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing. Clay Jeffreys can be reached at 678-730-1063 or by email at email@example.com