By now most have heard the news about the U.S. Department of Housing and Urban Development (HUD) making some significant changes this week that affect FHA loans. HUD released a Mortgagee Letter earlier this month detailing changes to FHA's Mortgage Insurance Premiums. According to the letter, these changes will apply to all FHA loans with case numbers assigned on or after October 4, 2010.
HUD has decided to raise FHA's annual mortgage insurance premium (collected on a monthly basis) and correspondingly lower FHA's upfront mortgage insurance premium (collected on the "front" end of the loan), except for Home Equity Conversion Mortgages (HECM).
The annual insurance premium, currently at .50% (to .55%), will be raised to .85% (to .90%). The five percent variables are based on loan-to-value ratios above or below 95%. The upfront insurance premium however, will go from 2.25% down to 1%. For those of you that prefer the language of Basis Points (BPS) to percentages, 1% is equal to 100 BPS.
Enough of the mortgage lingo. So what does all of this mean to the consumer? Well, it could be a lot actually.
PRE-October 4, 2010
Purchase Price: $200,000
Down Payment: $7,000 (3.5%)
Interest Rate: 4.5%
Upfront Mortgage Insurance Premium: $4,343
Principal, interest and mortgage insurance payment: $1,088.37
POST-October 4, 2010
Purchase Price: $200,000
Down Payment: $7,000 (3.5)
Interest Rate: 4.5%
Upfront Mortgage Insurance Premium: $1,930
Loan Amount: $194,930
Principal, interest and mortgage insurance payment: $1,132.43
As you can see from the example, the payment would end up being more than $44 per month higher. To put that in perspective, if your buyer is tight on his or her debt ratios, that "pre-approval" may no longer be valid. Depending on the price, their approved loan amount could be lowered by $10,000!
Fence sitting buyers: time to jump off that fence! Especially if the loan is an FHA loan. Even if it's not an FHA loan, this industry is continuing to change on a daily basis. You never know what tomorrow may bring. What we do know is that NOW is a great time to take advantage of 40-year low interest rates as well as phenomenal deals on homes.
Should you have any questions about these changes or how they will affect you, don't hesitate to contact me.
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