Lenders asked FHA, the Federal Housing Administration that offers home buyers low-down mortgages, to lower their monthly mortgage insurance fee. The rationale behind the request was this:
1) FHA’s profits are up and the administration is operating comfortably in the black, and
2) FHA changed their rules so that the mortgage insurance fee is permanent and cannot be waived no matter how much equity the homeowner accrues. With a conventional loan, the mortgage insurance fee stops once the home owner has 20 – 22% equity; but with FHA, it lasts for the life of the loan.
In response to their request, lenders received a big, fat NO. Carol Galante, the FHA Commissioner, said the current fees are “absolutely necessary,” and that “now is not the time to roll back premiums.”
In the future, FHA hopes to launch a program that will further increase the quality of loans. This program will be paid for by a fee to the lenders.
I have to ask, if lenders receive a new fee from FHA, who do you think they are going to pass that additional cost onto?
Now that this FHA program (commonly called a first-time home buyer’s loan) carries higher mortgage insurance fees and permanent monthly fees, how much more will home buyers accept before they say “NO” to FHA and choose a conventional loan instead?
Currently, a conventional loan requires a 5% down payment instead of 3.5% down for FHA. But if the monthly fees (on top of the upfront FHA fee) grow too high, home buyers may well decide the extra time it takes to save for the larger down payment is worth the wait.
Heads up! May 24 is the deadline for applying the cheapest FHA loan. An FHA loan is commonly called a First-Time Home Buyer’s loan, because the down payment requirement is only 3.5% of the purchase price. You do not have to be a first time home buyer to qualify for the loan, but you do need to live in the house as your primary residence for at least one year. This is not a loan for investors. The loan is backed by the Federal Housing Administration, and you may obtain the loan through any bank or mortgage lender that is licensed with the FHA. (Most lenders are.)
The reason I am calling May 24 the deadline for applying is because the private mortgage insurance fee increases on June 3rd. In order to make the June 3rd deadline, your loan file must have an FHA case number by that date. Because it can take a few days to get the case number, your loan officer needs to receive your application, along with all required financial documents by about May 24.
What is the FHA Price Increase?
FHA 30-year fixed rate loans with a down payment of less than 10% down will have the monthly mortgage insurance fee for the life of the loan–regardless of equity.
Loans with 10% or more down will have the fee for 11 years.
Previously, the MI fee could be cancelled after 5 years if you had at least 22% equity.
The mortgage insurance fee protects the lender in case you default on the loan. The insurance is for the lender, but the borrower pays for it. FHA is increasing the time the fee must be paid in order to protect their investment reserves. Currently, FHA has about $4 billion in reserves.
The only way to get out of the monthly MI fee early would be to pay off the loan by refinancing into a conventional loan.
If you can get your purchase contract signed this week, it would be in your best financial interest. I suggest that you speak with your real estate agent and loan officer about this looming deadline.