RTC Mortgage Blog

FHA Loans to Get More Expensive, Again!

The Federal Housing Administration (FHA) has recently announced changes making that mortgage loan program more expensive. There have been a series of increases since the FHA mortgage progam regained popularity after the mortgage crisis that began in 2007 – 2008. Some of the changes go into effect April 1, 2013 and the others bergin in June.

What Is An FHA Loan?

The FHA mortgage program originated during the Great Depression of the 1930s, when the rates of foreclosure and defaults rose sharply and mortgage money became scarce. The program was intended to provide lenders with insurance against default by the borrower.  Thus, it enabled buying and refinancing of homes when lenders wouldn’t or couldn’t. The goal was to make it self-supporting, based on insurance premiums paid by borrowers. The loan program lost popularity over the years as conventional loan programs served the need of most buyers.

With the advent of the financial crisis a few years ago, the U.S. Government enhanced the FHA loan program to fill the void left by lenders that again were unable or unwilling to lend mortgage money. The program has helped to provide much needed mortgage money during the recent recession. But, due to losses on insurance claims and a soaring budget deficit, the Government’s insurance fund is deep in debt. And, the conventional mortgage sector has gained strength lessening the demand for FHA insured loans.

Benefits of an FHA Loan:

When compared to “Conventional” financing, the FHA loan provides the following benefits:

·         Low Down Payments of just 3.5%

·         Low Interest Rates – currently about 3.25%

·         Loan amounts to $729,750

·         Liberal qualifying and underwriting – allowing lower credit scores than conventional financing

Disadvantages of FHA Loans:

While these benefits still exist, there are some disadvantages too, particularly with the new changes recently announced:

·         The annual cost of FHA mortgage insurance will range from .45% to 1.55% of the loan amount depending on loan size. 15 vs., 30 year loans and home equity or down payment. Conventional mortgage insurance typically costs 0.5% - 1.0%. Mortgage insurance premiums are annual but paid monthly.

·         In addition to the annual mortgage insurance, there is also an upfront premium of 1.75% of the loan amount. Conventional loans have no upfront cost.

·         The FHA insurance can no longer be eliminated once sufficient equity has been attained. The insurance will remain for the full term of the loan and can only be eliminated by refinancing with a conventional loan or by selling the home. Mortgage Insurance on Conventional loans is only required if the down payment is less than 20%, can be eliminated once 20% equity is attained and is automatically eliminated once the principal balance is paid down to 78% of the original appraised value or purchase price.

Should I Finance with FHA or Conventional?

FHA is still best when it’s not possible to put down at least 5% or 10% of the purchase price. It may also provide interest rate or cost advantages when credit scores are low. However, Conventional guidelines now allow down payments as low as 3% in some instances and the cost of conventional or Private Mortgage Insurance (PMI) is much less.

It’s important to consult with a qualified mortgage professional that can present the pros and cons of each program as they relate to a homebuyer or homeowner’s particular set of circumstances. We can prepare an Analysis comparing the short and long-term costs of each program and provide valuable advice to guide you to the right choice.