What are the recent changes to FHA mortgages? Are there other options?

Q.  What are the recent changes to FHA mortgages?  Are there other options for financing a home purchase?

A.  Effective 1/26/15, the Federal Housing Administration (FHA) lowered the monthly mortgage insurance (MI) from 1.35% to 0.85%.  This was a much needed change to make FHA mortgages more attractive to homebuyers.  On a $200,000 mortgage, the 1.35% monthly insurance premium was $225 per month; the new rate of 0.85% takes the monthly fee down to $142.  There is still an upfront MI payment of 1.75% of the loan ($3,500 on a $200,000 loan) that can either be financed or paid at closing.

FHA mortgages are popular because they are more lenient with the buyer’s credit score, and they only require a down payment of 3.5% but allow up to a 6% seller assist.  This opens up home buying opportunities to many Americans who may not otherwise be able to buy a home.

Interest rates have recently dipped below 4% making it a great time to buy.  This coupled with the new FHA MI rates should encourage first-time homebuyers to enter the market.

Conventional loans are still the gold standard for home loans with a 20% down payment eliminating any MI payments.  Traditionally, the minimum down payment for a conventional loan is 5% but that comes with MI ($166 per month on a $200,000 mortgage).  Even with a seller assist, not everyone has the cash available to close a conventional loan with a 5% down payment. 

Here are some other mortgage programs that are available:

Various 3% down conventional program with or without MI.  These special programs vary by lender and come with multiple restrictions such as only first time homebuyers, low to moderate income, property type, location, and price.  These usually allow for a 3-6% seller assist.

3% down conventional PHFA program with no MI and up to a 3% seller assist (comes with a slightly higher interest rate and there are income restrictions).

100% financing, USDA, conventional program with up to a 6% seller assist (low monthly MI but comes with property location and income restrictions).

Confused?  The mortgage market can be confusing and not all lenders offer the same programs.  Let us help you find the best program for your situation.