Goodbye FHA Loans

Looks like FHA loans are on their way out.

A couple weeks ago I did a post on the new increase in mortgage insurance for FHA due to a $16.3 billion dollar deficit. Read here.

The premise was HUD (FHA) is looking to and most likely will increase MIP (mortgage insurance premium) $15-20$ per month for moderate priced home buyers.

Well, their report to Congress has even more troubling issues. I’ll summarize below but the full report can be viewed through this link, FHA Loan Changes, on pages 55-56 of the pdf or pages 54-55 of the actual document.

Beyond the MIP increase, FHA will also require MIP to be paid for the life of the loan. Originally, the FHA mortgage insurance premium would be cancelled once the home owner pays enough to have a 78/22 loan to value ratio. That means the home owners makes enough payments to the point that the principal due back is 78% of the original amount. Market appreciation equity doesn’t count. This usually takes 5-7 years of payments.

Let’s look at the numbers to see what it means.

Prior To The New Policy

A $200,000 loan would have an FHA MIP payment of around $201 per month. $201 per month x 12 months per year x 7 years comes out to $16,884. So an FHA home buyer would pay $16,884 in mortgage insurance over the life of the loan.

After The New Policy

We need to add the new MIP increase to the above scenario. Take the original $201 MIP payment + $15 (low estimate) of the new increase = $216 per month. Now we take that $216 per month x 12 months x 30 years (new policy) = $77,760.

If you end up using FHA after this policy is approved you can plan on your $200,000 home costing $60,876 dollars more than if you bought it today.

Solutions

1. Timing: Get your FHA case number before the policy is approved. The policy will most likely become effective in 2013 but the month is unknown. If you can get into contract and have your lender get an FHA case # before the effective date then you’ll be under the old policy. Now there’s a little motivation for you.

2. Take Your Time And Save More Money: FHA requires a down payment of 3.5% of the purchase price. Conventional loans have 5% down options. If you’re not in a rush to buy take that time to save extra money so you can utilize a conventional loan. Not only will you bypass the FHA policies but conventional loan mortgage insurance is much less than FHA.

3. Just Eat It: Understand that the new FHA loan isn’t a good deal but get one anyway. *This isn’t your best option.*

If you have questions or want further information on buying a home feel free to contact Broker Kristopher Kent at (775) 870-4280 or Kris@Reno-Realty.com