Big Change is Coming for FHA Loans

FHA LoanThe Federal Housing Administration (FHA) is making some big changes to their mortgage insurance structure.

Starting October 4th 2010 the upfront mortgage insurance fee will be lowered from 2.25% down to 1%.

Sounds great doesn’t it?  Well hold on just a second…

FHA mortgage insurance is making up their losses by nearly doubling the monthly mortgage insurance that is mandatory on FHA loans.  Currently monthly mortgage insurance on a FHA loan is .55%, as of October 4th this will be .90% or even higher.

How does this affect you?

Typically borrowers apply for an FHA loan because the down payment requirement is only 3.5%, which is much lower than a conventional loan.  If you qualify for an FHA loan today your up front mortgage insurance may be $2,000 and your Monthly Mortgage insurance may be $90 (hypothetically).

If you get a FHA loan after October 4th your upfront mortgage insurance would be just under $1000, but your monthly mortgage insurance would nearly double at over $160 a month.  In this hypothetical scenario you would save $1,100 up front and spend $70 more per month.  It would only take 16 months before you spent more money monthly than you would have paying the mortgage insurance up front. After 3, 5, or even 10 years you are going to spend thousands of dollars more on the MI.

Now in a real loan the numbers may look different, but this scenario is meant to show you how the Federal Housing Administrations changes are going to affect you if you apply for a FHA loan after October 4th.

To Sum it all up…

In summary the new changes are going to end up costing homeowners who stay in their house longer than just few years thousands of dollars more.

If you stay in your home just a short time, like under 2 years, this new deal may end up saving you money.  Have your Loan Officer crunch the numbers so you know what type of upfront costs and monthly costs will be associated with your FHA loan.

And if you can qualify and close your FHA loan before October 4th 2010 that may save you thousands of dollars over the life of your mortgage insurance.

Should I do a FHA Loan for My Mortgage?

An FHA Loan could be the answer you are looking for.

FHA loans are insured by the Federal Housing Administration (FHA).  There are some certain rules and benefits that come with FHA loans.

Here are the details you will need to know about an FHA loan.

Benefits of an FHA Loan:

  • Low Down Payment – FHA only requires 3.5% down payment on purchases.  Compare this with 5% on conventional loans. (5% if you are lucky, most likely the down payment will be no less than 10%.)
  • Lower Closing Cost Fees – This is one of the rules for the broker. There are certain fees that cannot be charged into an FHA loan which makes your closing costs less expensive.  Now most brokers and banks will try to make this up somewhere else so they do not have to pay those fees.  This is okay because those fees need to be paid, but you can ask them where they are making up the money for the fees that cannot be covered.  It will either be more points on the front or in the YSP (What is YSP?)
  • Lighter Credit Requirements – This means your credit score can be lower and still qualify for a FHA loan.

Cons of an FHA Loan:

  • Up Front Mortgage Insurance – FHA loans charge an upfront mortgage insurance fee of 1.5%.  You will have to pay this on the front of your loan making it more expensive than a conforming loan.  The fees cost less but mortgage insurance ads more.
  • PMI – Most people that opt for an FHA loan do so because of the 3.5% down payment.  This means you will have to pay a monthly mortgage insurance.  For mortgages with terms 15 years and less and with Loan to Value ratios 90 percent and greater, annual premiums will be canceled when the Loan to Value ratio reaches 78 percent regardless of the amount of time the mortgagor has paid the premiums.

If you are in the market for a mortgage be sure to ask your broker about an FHA loan. An FHA Loan could be the answer you are looking for.