FHA is still a good loan, and for many borrowers the only option, but some changes have occured which may make a conventional loan better in some cases – especially if you have very good credit – 720 FICO and above, and can put more money down on the home. Always consult with a good lender to explore the best loan options.
How FHA-Insured Mortgages Work
Most people forget — the FHA is not in the business of making loans to homeowners. Rather, the FHA insure loans that lenders make to borrowers. The FHA puts out a set of guidelines says to banks that “so long as your borrowers meets these requirements, we will insure the loans you make to them.”
Now, banks don’t expect their FHA-backed loans to go bad, but when their loans default, the FHA steps in and makes payment on them similar to how any insurance-type company would operate. And, to fund these claims, the FHA uses its insured borrowers’ own money.
Homeowners backed by the FHA pay into the FHA insurance fund in two ways:
1.With a one-time, upfront payment at closing called Upfront MIP
2.With an monthly, pro-rated annual payment called Annual MIP
Mortgage insurance premiums kick off a lot of money and the FHA has been self-funded for years without issue. However, as FHA home loan defaults have climbed recently, so have insurance payouts to lenders. It’s put a ginormous strain on the FHA’s solvency.
For example, in September 2008, the FHA held $19 billion in reserves. Today, that number is $3 billion.
In the FHA’s own words, the groups reserves are “perilously low”.
Summarizing The FHA Mortgage Insurance Changes
As a means to help refill its coffers, therefore, the FHA recently changed its upfront and annual mortgage insurance premium structure. It’s the second tweak of 2010 and the changes apply to FHA case numbers issued on or after October 4, 2010.
Under the updated mortgage insurance program, assuming a 30-year fixed rate FHA mortgage with at least 5 percent equity:
•Upfront MIP drops to 1.000% of the amount borrowed from 2.250%
•Annual MIP increases to 0.850% of the amount borrowed from 0.500%
For homeowners using an FHA-insured mortgage, the upfront cost of the loan will drop by a lot, but the long-term costs of the loan will grow.
Using a $200,000 mortgage as an example, upfront MIP falls to $3,000 from $7,750; monthly MIP jumps to $212.50 from $125.00. The FHA expects the change to yield an additional $300 million in premiums monthly.
Of course, Mortgage Insurance Premiums can be terminated once you have 20% equity in the home – the key is to stay in touch with the market and have your home appraised when you think you have built up sufficient equity. Always contact your lender about getting MIP removed before you pay for an appraiser.
In Summary:
•Previous MIP system : Big upfront costs, low long-term costs
•New MIP system after October 4, 2010 : Low upfront costs, big long-term costs – costs you less up front, but more in the long run – for as long as your home has less than 20% equity.
Contact me anytime at 678-585-9691 if you need a market analysis of your Atlanta homes value or a referral to a great Atlanata lender.
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