Change in FHA Mortgage Insurance

The FHA (Federal Housing Administration) is the nation’s largest insurer of low down payment home loans and, starting next month, home buyers who qualify for an FHA mortgage loan will be in for some changes.

Announced in January but effective June 3, when a home purchase is insured by the FHA, buyers will no longer be able to drop their mortgage insurance once the balance drops to 78 percent of the value of the home.  Mortgage insurance will now be required for the life of the loan. This change in policy comes as the agency attempts to build up its Mutual Mortgage Insurance Fund.

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 percent down payment, this option appeals to many new buyers or those with lower credit scores who don't qualify for conventional loans.

The upfront loan fee home buyers pay for an FHA-backed loan is jumping as well from 0.1 to 1.35 percent.  With conventional loan and cash buyers having an advantage in the marketplace, this change could hinder FHA buyers from realizing their dream of home-ownership. With less competition for homes, we could see demand go down, making interest rates go up.

The 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 mortgage insurance requirement, this may lead to less people buying homes.

Others in real estate see the mortgage insurance change as small and don't feel it will make a big impact on home sales. Many real estate professionals feel buyers won't back out because they don't want to pay the mortgage insurance. For some, an FHA loan is their only hope for ever purchasing a home with a low down payment. They contend that there are other options for buyers once they get into a home and gain some equity. Once buyers get their foot in the door with FHA, they can refinance through a conventional lender and get out from under the mortgage insurance rule.

Only time will tell if this new rule will have any effect on the real estate market. But buyers should be informed, know their options, and find a good Realtor who can help them through this most important decision-making process. With interest rates still very low, there is no better time to find that home you've been dreaming of, regardless of the changes announced by the FHA.