You might already know that FHA is increasing their upfront funding fee on April 5th from 1.75% to 2.25%. It is a big-ol’ hike, but better than the alternative of raising the down-payment requirement from a currently low 3.5%.
So what is a “funding fee” and how will this affect you as a consumer? It’s a bit complex and it depends on where you are in the home buying stage. To start, this will only affect you if you are about to purchase a home or condo using an FHA loan. If you are purchasing a home using a conventional loan with less than 20% down, you *might* be affected – see your lender for details.
You’ve probably heard of PMI or private mortgage insurance. PMI is the insurance you must pay when you purchase a home with less than a 20% down-payment. This “insurance” is designed to cover the lender (NOT YOU) in the case of default, but you are the one who must pay for it. While collection methods and amounts can vary with some conventional loans, PMI is typically collected twice: once as a 1.75% upfront fee that can either be collected as closing costs or rolled on top of the loan. And second as a monthly recurring fee of .055% added to your mortgage payment until your home value drops below 80% of current market value.
Well, the FHA also charges this type of insurance but they call is MIP or mortgage insurance premium. Historically their upfront funding fee was structured exactly the same as above, however on April 5th, 2010 the upfront fee will increase from 1.75% to 2.25%, effectively making you pay a half a percent more for your home. This change will effect all loans with case numbers issued after the April 5th deadline. If you are a buyer under contract now, be sure to call you lender to ensure that you already have a case number. If you plan to purchase a home in the next seven days, you’ll need to act swiftly to ensure that you get a case number in time. It should be noted that your lender can not get a case number without a fully bound and executed contract. In other words, the lender can’t get a case number if you are still shopping or in negotiations.
So future buyers, yes, this new fee does kinda bite. But since the additional fee is typically rolled on top of your loan, so it won’t hurt your wallet quite a much as an increase in the down-payment requirement (at least not until it’s time to sell your home). There were rumbles that down-payments might rise to a 5%-10% minimum which would have bumped many prospective buyers out of the market.
Why the rate hike? FHA has become extraordinarily popular in recent years, but higher rates of default during the recession has caused it’s reserves to fall dangerously low. This rate hike will help refill the coffers to bring FHA back into the black. This is ABSOLUTELY NECESSARY in order to help stabilize real estate markets and interest rates.