WBAB / WBLI COMMERCIAL
(Long Island, NY) In light of a major shortfall in its reserves, the Federal Housing Administration recently announced a big change to its mortgage insurance policy. Currently, home buyers only pay mortgage insurance premiums until they achieve 20-to-22-percent equity. At that point, the insurance can be dropped, which results in lower monthly payments. Beginning on June 3rd, however, the majority of people who take FHA mortgages will be paying mortgage insurance throughout the terms of those loans. Despite that, the change isn’t expected to dramatically reduce the popularity of the loan program.
What is Mortgage Insurance?
Most lenders require mortgage insurance unless home buyers make down payments of at least 20 percent. One of the most popular aspects of FHA mortgages is the fact that they require down payments as low as 3.5 percent. As a result, many people who take FHA loans put down far less than 20 percent and end up paying mortgage insurance. Mortgage insurance premiums are typically rolled into monthly mortgage payments, which usually also include homeowner’s insurance and property taxes.
Depending on the amount of the home loan, mortgage insurance can really add up over time. However, the upfront mortgage insurance fee is usually negligible, and most people are fine with paying more every month in order to buy their homes. Furthermore, at the time of closing, people are informed of approximately when they will reach the 20-to-22-percent equity threshold, so they have a decent inkling about when their mortgage insurance premiums will end. Under the new policy, this will no longer be the case. At closing, those who opt for FHA loans will be informed that their mortgage insurance premiums will continue until their loans are complete. In other words, they will typically pay these premiums for 30 years.
Will the New Policy Affect the Popularity of FHA Home Loans?
It’s easy to assume that the new policy will negatively affect the popularity of FHA loans. When you consider who typically applies for these loans, however, it turns out it may not be much of an issue. The vast majority of people who use FHA loans are first-time home buyers. These loans are attractive to such buyers for a number of reasons. The eligibility and credit requirements are a lot less stringent than those that are attached to conventional mortgages. What’s even more alluring is that very low down payments are perfectly fine. In fact, a home buyer can get away with putting down as little as 3.5 percent.
First-time home buyers typically don’t have the cash that’s needed to make 20-percent down payments. That isn’t going to change. Therefore, they should continue to turn to FHA loans despite the change in the mortgage insurance policy.
Why has the Policy Changed?
Last November, the FHA reported a shortfall of $13.48 billion. This was primarily caused by loan defaults. These defaults have been caused by the housing crisis and the ongoing recession. Although conditions are improving, high numbers of defaults are expected to continue for some time. The FHA insures all of its loans, so it depends on that fund. The shortfall is a serious problem, and the change in the mortgage insurance policy is expected to generate billions of dollars in increased revenue for the agency. Its implementation should help to keep the popular program afloat, which is great news for first-time home buyers.
Getting Around the New Policy
While the majority of those who receive FHA home loans on or after June 3rd will have to pay mortgage insurance throughout the completion of those loans, there is one way to dodge this bullet. Home buyers who are able to put down at least 10 percent on their new homes may be able to eliminate mortgage insurance after 11 years. This is still a lot more restrictive than the terms of the old policy. When you consider the fact that first-time home buyers typically only stay in their homes for about seven years, this loophole is even less compelling. Still, some home buyers are sure to take advantage of it in order to have a way out in the future.
Of course, there is no law that says a person has to keep the same home loan through its maturity. People refinance all the time. As low as rates are now, however, they are very unlikely to dip further. If anything, they will increase. Refinancing may not be such an attractive option in a few years. At any rate, there is still time until the FHA’s new mortgage insurance policy goes into effect. With today’s low rates and the new policy on the horizon, it’s in prospective home buyers’ best interests to act quickly. By finding a new home and closing on it before June 3rd, they will enjoy the best of both worlds.