Today, an FHA mortgage remains the only low down-payment lending product, requiring just 3.5% from borrowers. Just five years ago, FHA loans had a market share of only 5%.  In 2010, FHA lending accounts for about 30% of all home loan originations nationally. This surge of mortgage loan volumes has increased the pressure on the FHA Mortgage Insurance Fund. FHA is required to maintain this emergency fund of reserves above 2% based on all of its insured mortgages.  This year we saw the reserves fall well below the 2% minimum and HUD has been forced to take drastic steps, like tighten the FHA guidelines.

FHA Mortgage Lending Back in Style

In an effort to preserve the sacred FHA loan program, HUD announced it will be raising its annual mortgage insurance premium from 0.55 % of the mortgage amount to 0.90% (for loan to values higher than 95%) or 0.85% (for LTVs lower than 95 %). This insurance premium hike will go into effect, October 4th, 2010.  In an effort to save face, FHA will be lowering their upfront mortgage insurance to compensate homeowners for their rising monthly payments. This is good news for new homebuyers because the fees are dropped to 1% of the loan amount from 2.25%.  Overall, it looks to add $300 million a month to the insurance fund by taking these actions.

FHA Borrowers to Pay More Monthly

So what does that mean to FHA buyers come October? It means they will be paying more each month.  For example, let’s take a $250,000 purchase. Under the current FHA mortgage insurance framework, the upfront premium would be $5,428 for a total loan amount of $246,678. The monthly mortgage insurance would be $110.57. Take an interest rate of 4.625%, and the principal and interest payment would be $1,268.27. Add the $110.57 and you get $1,378.84.

Under the new FHA requirements, the new upfront amount would be about $2,500 on a FHA mortgage loan amount of $250,000. However, the monthly insurance jumps to $180.94. Take the same interest rate, and the principal and interest payment decreases to $1,252.76. But with the higher premium, that total payment comes in at $1,433.70, an increase of almost $55 a month.  To a borrower who is just barely qualifying, that can have an effect. It also puts into play taking another look at private mortgage insurance as an alternative for the borrower.  These types of adjustments shouldn’t be surprising as FHA tries to adjust to the marketplace. It recently released its quarterly report to Congress, and it shows just how much FHA has become a part of the mainstream when it comes to mortgage lending.

Just last week, the Secretary of HUD announced new federal guidelines for FHA home loans which allow First-Time Homebuyers (FTH) to monetize their $8,000 Obama Tax Credit upfront, for use toward their down payment or closing costs, rather than only after close of escrow.  How will this work? No one really knows yet – federal lending guideline changes usually take a month or so to manifest into concrete checklists and phone numbers you can call to take advantage of them. But it looks like state Housing Finance Agencies and HUD-approved nonprofit organizations will be involved, and will provide the upfront funds to borrowers (for a small fee, of course), which they’ll be reimbursed at tax time next year.

However, the author of the article, noted that she has not heard anyone actually suggest that the upfront monetization of the FHA tax credit won’t be effective at stimulating home sales. On the flip-side, the National Association of Home Buyers’ projections show that about 160,000 homes will be sold as a direct result of this new incentive. But there are folks who don’t like it, and their arguments tend to focus on the worry that no-skin-in-the-game borrowers are the sort of problem homeowner who created the market madness by just walking away when their homes devalued. The pestimistic crowd says that that we might be returning to the bad old days of 100 % financing.

FHA loan overview:
This is a new era of mortgage lending than the stated income days of old (old =2005). It wasn’t no-skin-in-the-game borrowers who walked away and created the foreclosure crisis, it was no-skin-in-the-game borrowers who couldn’t afford their escalating mortgage payments who were the problem children of the real estate market. The upfront monetization of the $8,000 tax credit will only be available for FHA loans, which require full documentation of income, impose strict and low debt-to-income ratios and are characterized by low, 30-year fixed interest rates and payments. This is not a return to the subprime era, when you only needed to be human and alive to get a loan (notwithstanding those few times we saw the deceased and the canine get mortgages).

On careful reading of the few details we do have on this program, it’s clear that it does not, in fact, reduce the amount of down payment funds that need to be deposited by the buyer to get an FHA loan. The $8,000 credit cannot, under current law, be used to meet the minimum 3.5% down payment requirement (although gifts from relatives can). The upfront $8,000 is available for home-buyers to use as extra down payment money (to buy more or lower monthly payments), to pay discount points (reducing their interest rates) or to defray closing costs.  That’s it.

This FHA loan program changes the time frame in which First-Time Homebuyers who close escrow by December 1, 2009 will be able to benefit from their tax credit. Frankly, I’d imagine this will mean lots more folks will put the funds into their homes and into making their loans more affordable. 

Compare FHA mortgage rates and FHA lending costs: Borrowers have never been in a better position to qualify for lower mortgage rates.  We suggest analyzing 3 loan offers from different lenders or brokers.  Compare interest rates, loan amounts, origination fees, discount fees, processing fees, underwriting fees and the appraisal fees. Don’t forget that with FHA refinance loans all cash out transactions above 85% Loan to Value now require 2 appraisals from FHA licensed appraisers.  Don’t forget to factor in the upfront mortgage insurance premium, with FHA mortgage loans.  See the complete article at FHA Home Loan Costs.

FHA offers mortgage insurance but they do not make home mortgages. However, the FHA home loan program often minimizes the cost of a home financing and there are no penalties for refinancing or early pay-off.  In addition, FHA encourages lending companies to finance loans for borrowers with all types of credit.  With FHA’s Section 203(b) program, a homebuyer can purchase a new or used 1-4 family home. FHA home-buyers must occupy the home.

A FHA mortgage enables borrowers with poor credit scores to qualify for the reduced rate loans, rather than taking the higher adjustable rate loan offered by sub-prime lenders. This can save thousands in interest charges.  Required down payments are also smaller. Instead of the typical 10% down, a buyer can put down as little as 3%. The closing costs can also be financed with the mortgage, lowering the initial costs of purchasing a home.