FHA is getting more expensive, but this is a good thing.

Changes are coming to FHA in 2013

Just about everyone who has bought a home in the last five years is familiar with the term “FHA” loan. Since the mortgage crisis in 2007, FHA has become the low down payment loan of choice for many borrowers. In fact, prior to the downturn in 2007, FHA insured about 2% of all purchase money mortgages; that number had increased to over 33% of all mortgage nationally, and is currently floating  in that range. And by now you are probably thinking, so what, right? Things are about to change.

                Let’s talk for a minute about what FHA actually does and does not do. FHA does not loan money. When you get an FHA loan, you are basically getting a conventional loan with a lower down payment and some increased flexibility in the qualifying standards. This increases the risk for the lender. To offset this risk, FHA insures the lender against loss in the case of borrower default. The current top limit on this insurance is 96.5% of the loan value (and this is why FHA loans require a minimum of a 3.5% down payment). This can people who may have bruised credit or less money for a down payment get a home. Sounds like a pretty noble idea, right? It is, sort of…there are some costs though. Please keep reading.

                There are two main costs associated with an FHA mortgage. The upfront mortgage insurance premium (UFMIP) and annual mutual mortgage insurance (MMI) premiums. The UFMIP is paid as a fee at the time of closing and the MMI premium is added to the monthly payment. The standard used to be that the MMI would be dropped when the loan-to-value (LTV) reached 78%. Starting in April of 2013, on a 30 year FHA mortgage with an LTV of greater than 90% at the time of origination, the MMI premium will be payable for the life of the mortgage. This can add cost not only to the monthly payment, but the total paid over the life of the loan. For full details, see the HUD Mortgagee Letter 2013-4.

                There are many factors that determine the amount and term of the FHA costs assessed when closing the mortgage. The purpose of this blog was not to explain them all. A qualified loan officer is always going to be your best reference for that information. The point here is to illustrate that FHA is changing, and the cost is going up. This will begin to make conventional financing options more appealing to buyers.

For sellers this will be good news as the underwriting and appraisal standards for conventional loans are more conducive to closing the transaction. For buyers, this means that if they have not applied for a mortgage by April 2013, they will want to review conventional options with their mortgage professional. For Realtors this means we need to be aware of the changes to properly counsel our clients. For Americans this means that HUD is doing something to shore up the MMI fund before FHA needs to be rescued by another bailout, and that is good for everyone.

As always, please contact me with your Real Estate related questions at www.JasonGault.com. Happy Selling!