The FHA has made several changes throughout the last year, but there is another one in the pipeline that is pretty significant. In an effort to shore up the FHA reserve fund kitty, FHA is lowering the Upfront Mortgage Insurance Premium (UFMIP) from 2.25% to 1.25% (good), and increasing the Monthly Mortgage Insurance Premium (MIP) from .0055 to between .008 – .009 (bad). This change will take effect for any loan with a case numbered registered as of September 7th, 2010.
So what does this mean to you the consumer? Well, it’s a little complicated. Ultimately you will probably save a tiny bit of money if you keep your home the “normal” amount of time for 3-5 years. However, your monthly payment will be a tad bit higher than it would be under current guidelines.
You may ask “How am I saving money if my monthly payment is higher?”
Well, it all has to do with that Upfront (UFMIP) fee reduction. You see, when you currently get a government insured loan, there is a large 2.25% fee that is charged as a closing cost and rolled ON TOP of your regular loan balance. So even though you may make a 3.5% down-payment on a $100,000 property, your beginning loan balance will be $98,617 (100k – 3.5% + 2.25%). At the current rate of .0055%, the monthly MIP would be $45 per month for this example.
But starting next month, the same price point will have a different formula. The beginning balance on the loan will be $97,706 (100k – 3.5% + 1.25%) and the monthly MIP will between $66 (at .008%) and $74 (at .009%). I need to do a little more research to find out how lenders determine what your monthly MIP rate will be…
I love the fact that the UFMIP rate has been lowered because I’ve always found it to be a tad excessive, but it’s the premium you pay for having the luxury of such a small down-payment. This lower rate means that you stand to make a little more money when you eventually sell of refinance the home (because your loan payoff amount will have a lower balance). However, I find that first-time buyers are more concerned with the monthly carrying costs of a loan. These FHA changes will ultimately raise the monthly payment by about $23 per month per 100k financed and this is where I take issue. This $23 monthly fee is going to factor into how much monthly payment you can qualify for. Because loan pre-qualifications are based on a percentage of your net income, this change is going to slightly REDUCE the total loan amount you can qualify for. To me, this seems like the wrong way to stimulate the economy.
Right now FHA is guaranteeing roughly one-third of the loans being issued. I’m betting this change is going to significantly reduce that market share. If I were a first time home buyer, I think I might look into conventional loan alternatives. As of printing, many lenders are offering 95% conventional financing. I’ve yet to hear that any of them are upping their monthly MIP from the .0055% (of course these announcements may come in the coming weeks).
I counsel all my buyers to assess their home buying readiness PRIOR to actually viewing homes. I think it is critical to sit down with a loan officer face-to-face at the very beginning of your home search process to make sure you understand:
- how much house you can comfortably afford on a monthly basis.
- the effect of mortgage insurance, taxes, homeowners insurance and HOA dues on that budget.
- the effects of interest rate changes on pre-qualification amounts.
- whether or not existing debts on school loans, cars, and credit cards will affect the home loan you qualify for.
- the true costs of Closing Costs. It is common today to ask for the seller’s help in paying them, but doing so will severely limit pricing negotiations which will affect value appreciation over time.
If you are thinking of entering the Nashville housing market, I recommend these wonderful local loan officers:
http://vendors.StephanieCrawford.net
