FHA Guideline Changes Affecting Home Buyers

Many homebuyers in today’s market lack the 20% down payment to purchase a home with conventional financing. When the housing market was booming a few years ago, homebuyers could make up the difference by getting a second mortgage or equity line to cover some of that 20%. Prior to that, one could also hope to get private mortgage insurance (PMI) so that the lender would allow a lower down payment in the range of 5-10%. With many of the PMI companies still reeling from the housing crisis and unwilling or unable to write new policies of mortgage insurance, most homebuyers with less than a 20% down payment have been pushed into a government sponsored loan program through the FHA which allows down payments as low as 3 1/2%. The popularity of this program has skyrocketed over the past few years as they have been the lender of last resort when no other options are available for low down payment homebuyers. With their increasing liability in the mortgage market, FHA has recently increased the fees they charge for their own mortgage insurance, included with all FHA loans.

When a buyer gets an FHA loan, they pay mortgage insurance in two ways, first an upfront fee which is currently 1% of the loan amount, and second, a monthly amount added to the mortgage payment. As recently as a little over a year ago, the typical monthly amount added on to a monthly payment of a new loan was .55% annually, or in the example of a $500,000 home purchase with 3 1/2% down payment, about $221 a month. Recently, FHA has had a number of increases that ended up more than doubling their monthly mortgage insurance rate to 1.15% over a short period of time, making that monthly mortgage insurance premium in the same example $462 a month. That’s quite a steep amount to add on to a mortgage payment for many buyers. While interest rates have been at historic lows, more homebuyers will be unable to qualify or afford the higher amounts, causing them to lower their purchase price expectations or put off buying a home. The mortgage insurance fees continue for at least 5 years, and after that, may be eliminated when the loan to value ratio, based on the initial amortization schedule, reaches 78%.