Thanks to Pam Burzynski for sharing with us the upcoming changes to an FHA Loan. Mortgage Insurance may stay with the Life of the Loan!
Will the upcoming FHA changes affect your ability to purchase that home you've been wanting? There has been a lot of buzz lately about the changes to the Mortgage Insurance (MI) portion of your FHA loan. The changes are scheduled to take place on April 1, 2013 and June 3, 2013. You may even be hearing it reported in the news that the changes could drastically slow down the recovery in the housing industry.
As a Realtor it’s important that I keep up to date on the changes that are taking place in the mortgage industry so I can best serve my clients. I rely on my mortgage partners to help me be aware and understand options and changes that are taking place.
I got together with Mike Drew of Gateway Funding, and we talked about how the changes would or would not effect the real estate market. We concurred that the effects can be minimal if buyers are properly educated by their realtors, title agents and mortgage professionals.
So first, let’s recap what the changes are:
- On an FHA case number pulled after 4/1/2013 the MI will increase from 1.25% to 1.35%
- On an FHA case number pulled after 6/3/2013 the monthly MI will remain part of the payment for the entire term of the loan.
How will these changes affect a typical FHA buyer in today’s market? First let’s think about the pros of an FHA loan:
- Minimal down payment
- Large allowance of seller paid closing costs – up to 6%
- More lenient credit requirements
- Higher debt ratio allowance
These are all benefits that appeal to the average first time home buyer or “trade up” buyer who may not have saved much money or had some credit slip ups. In most cases we are talking about buyers who would choose FHA financing because they had no other viable options.
The biggest con to an FHA loan is the MI. Even before it increases on April 1st the monthly MI for an FHA buyer would currently be $125/month for every $100,000 of their loan. As an example let’s take a $200,000 loan—the monthly MI now is $250. After April first it would increase to about $270. Will this increase stop buyers from moving forward with a purchase or cause them not to qualify? Most likely it won’t, and especially if they understand how minimal the impact really is.
All of that said, Mike Drew says that he has noticed the most resistance to the upcoming changes has to do with the change coming on June 1st that will cause the MI payment to remain for the entirety of the loan term.
Let’s think about the REAL effects of this change for a moment. On current FHA loans the MI stays in effect for 5 years OR until the LTV of the loan is at least 80%. On a standard $200,000 amortization at 3.75% interest and making only the minimum payment each month, the 80% mark is met 9 years and 3 months later. In order to reach 80% in 5 years on that loan, the buyer would need to pay about an additional $300/month each month. Now keep in mind, this is the same buyer who needed to utilize the “minimal down payment, seller assist, lenient credit requirements, or higher debt ratio allowance”—so one would logically assume that an additional $300/month would not be practical.
We could also make an educated guess that our typical FHA buyer is a first time home buyer or a first time “trade up” buyer, which means that it is unlikely that they are purchasing their “forever” home. This means that it is again very likely that some time during the 5-9 years they are paying their monthly MI, they will sell the home or refinance into a more appealing form of financing, making the change to the length of time the MI remains in effect a non-issue.
Finally, the upcoming FHA changes also come with positive changes for other mortgage programs. Conventional PMI companies have started to loosen some of their criteria and there are new mortgage programs emerging that may be suitable FHA substitutes.
Educating buyers is key, and if we do that these changes can have little to no effect on the housing recovery. FHA is still a great loan program that allows a wide variety of buyers to reach the dream of home ownership. Especially since the FHA option is generally the first financing step and not a 30-year step.
We’d love to hear what you think about these upcoming changes and their implications.
photo by: nikcname
Pam Burzynski, e-PRO, ABR
Helping you create a Moving Experience in the
Bethlehem, Nazareth, & Easton Areas of The Lehigh Valley PA
Cell: 610-428-4151 | Email: email@example.com |
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