HUD and the Federal Housing Administration (FHA) is the nation’s largest insurer of low down payment home loans. That’s right, FHA doesn’t actually make mortgage loans – they simply insure the Bank against default. The FHA PMI is, more or less foreclosure insurance for the Bank – at a rate close to 25%.
As you can imagine, with all of the foreclosures we’ve had during the last five years – they’ve dipped into their insurance fund multiple times a day to bail out a bank that now owns a house because of foreclosure. In some cases, instead of just bailing out the bank – it was cheaper for FHA to actually take the property back. This gets the debt off of the Bank’s balance sheet, and keeps the Bank more “liquid” / inline with what the auditors need for them to be. The homes that FHA takes back are then sold through the HUD Home Store.
FHA PMI Rates change in a consistent fashion to pump more money into the reserves, to keep up with the demand on the Insurance funds they have to pay out for foreclosed homes. Theoretically, as the number of defaults goes down, the FHA PMI rates will go down too.
In another effort to bring more money into the FHA PMI Reserve – FHA announced a change regarding how long FHA PMI will stay in place on the mortgage. Effective June 3, 2013 when a home closes that is insured by a FHA Mortgage, the buyers will no longer be able to drop their FHA PMI… if you make less than a 10% down payment. If you make more than a 10% down payment – then the FHA PMI will stay on your mortgage for at least 11 years, and the point that you hit a 78% loan to value ratio.
Before this change (read: If you took your mortgage out prior to June, 2013) FHA PMI can be cancelled once the balance drops to 78 percent of the value of the home and you’ve made at least 60 payments. The FHA PMI Life Of The Loan Policy is in place for all loans made after June 3, 2013, that have less than a 10% down payment – if you took out your loan prior to June, you will still be under the guidelines that allow for the FHA PMI to come off once you have a substantial equity gap in your home (22% Equity is required), and you’ve made at least 5 years of payments.
There is mixed reaction to this news from the real estate world. Some see the change as a hurdle for buyers who need a loan with a low down payment. Since FHA insured loans only require a 3.5 percent down payment, FHA appeals to many new buyers or those with lower credit scores who don’t qualify for conventional loans. Additionally, NC First Time Home Buyer Programs / NCHFA can be used with an FHA loan, and this allows us to provide qualified buyers:
The annual FHA PMI loan fee home buyers pay for an FHA-backed loan jumped this spring from 0.1 to 1.35 percent. With conventional loan and cash buyers having an advantage in the marketplace, Real Estate Professionals are concerned this change could hinder FHA buyers from realizing their dream of home-ownership. With less competition for homes, we could see demand go down, a twist that is more likely as mortgage interest rates go up this summer . In fact, mortgage interest rates jumped more during the last week than they have since 1978. First Time Homebuyers, in particular are being urged to buy a home in Raleigh, now before the cost goes higher.
FHA has communicated that they want more people to buy homes and are looking to ease up on qualifications again. However, in light of the FHA PMI requirements, this may lead to less people buying homes.
We talked to some “veteran” Real Estate Agents (with more than 20 years of experience) about the FHA PMI change. They remember mortgage rates at 13.75%, and think that these slight moves are just that Adjustments. The Agents we spoke with didn’t feel the FHA Changes will make a big impact on home sales.
Johanna Brown, with REMAX told me that, “Buyers won’t back out because they don’t want to pay mortgage insurance. For some, an FHA loan is their only hope for ever purchasing a home with a low down payment.” FHA has traditinally been the loan program for First Time Home Buyers – then, once you have equity built up in the house, you can always refinance into a Conventional loan.
Only time will tell if this new rule will have any effect on the real estate market. But first time home buyers should be informed, know their options, and find a good Realtor who can help them through this most important decision (we can make recommendations ). With interest rates still much lower than they were when we bought our house… there is no better time to find the home you’ve been dreaming of, regardless of changes announced to the FHA PMI Program.
Have more questions about the FHA PMI Life Of The Loan Program?? We are here to help! Leave us a comment below, or Call Steve and Eleanor Thorne, Best Mortgage Rates in Cary NC, 919-649-5058 Find us on Google + and Facebook