Huge Rate Drop Means FHA Financing is Back!

Huge rate drop means FHA financing is back!

FHA (The Federal Housing Administration) just announced a huge drop in its mortgage insurance premiums.  This is most beneficial to first time buyers who depend on the low down payment of FHA loans and it’s more flexible lending requirements.  On a $200,000 home loan, here in Minnesota, that could save borrowers $1,000 a year.  The proposed annual rate will drop from 1.35 to 0.85.  Recently, it’s been the no brainer advice in low down payment situations that it’s much better financially to go with a 5% down conventional option than FHA (which is 3.5% down).  FHA has been the backup option for buyers.  This announcement by FHA is a game changer and means once again that FHA financing is competitive. 

So what is mortgage insurance? 

Mortgage insurance is a monthly fee paid to your lender that covers their risk when you take out a home loan with less than a 20% down payment.  My experience is, that this is the most misunderstood aspect of financing for first time buyers.  It’s often confused with home owners insurance. (Which your lender will also require you to have) Mortgage insurance or PMI doesn’t protect the borrower; it is for the lender’s benefit.    It’s figured on an annual basis but is paid monthly.  In the above example it would be $1,700 a year or $141.67 monthly.  It is also often forgotten by first time buyers when looking at how large a home they want to purchase.  If you are planning on putting less than 20% down, plan on paying PMI.  You can use a mortgage calculator to help you set your new home budget.  A good rule of thumb is, to try to be at 30% or less of your gross income.

The current loan process is highly complex and always changing so be sure to consult a great Realtor like Brooks Johnson! Who can recommend some of the best mortgage professionals in the industry!