Effective for all case numbers assigned on or after April 18th, an FHA loan will be more expensive.

The annual mortgage insurance premium (MIP) is equivalent to a conventional loan’s private mortgage insurance (PMI) on many levels.

The increase is equal to 25 basis points or 0.25% and applies to all FHA borrowers in the same way.   If you have an existing FHA loan, your current MIP payment will not change.

MIP is a percentage and is paid monthly.  So, a $200,000 loan is going to have 0.25% in annual increase or $500.  The monthly payment would go up by 1/12th of that, or $41.67/month.

This change is largely driven by the large and rapid growth in the use of FHA financing.  In 2006, FHA was 4% of the purchase money loans and just 2% of the purchase money in terms of dollars.  In 2010, it was 19%.  The full FHA report is here.

Rapid growth stretches capital and that’s what is happening now.  By law, the FHA must maintain certain levels of reserves.

Thus, your new premiums are all .25% higher and are as follows:

• 15-year loan term, loan-to-value > 90% : 0.50% per year
• 15-year loan term, loan-to-value <= 90% : 0.25% per year
• 30-year loan term, loan-to-value > 95% : 1.15% per year
• 30-year loan term, loan-to-value <= 95% : 1.10% per year

There is no change planned to the 1 percent upfront mortgage insurance premium (UFMIP) charged by the FHA.

For the third time in 12 months, the FHA is changing its mortgage insurance costs. 

Effective for all FHA case numbers assigned on, or after, April 18, 2011, annual mortgage insurance premiums (MIP) will increase 25 basis points.

The change will add $250 to an FHA-insured homeowner’s annual loan costs per $100,000 borrowed, and applies to all borrower’s equally. Current FHA borrowers are unaffected.

To understand the FHA is to understand why premiums are rising.

As an institution, the Federal Housing Administration plays a much larger role in the U.S. housing market today than it did just 5 years ago. According to its own records, the FHA’s percentage of purchase money business nationwide expanded from 4 percent in FY 2006 to 19 percent in FY 2010.

Rapid growth like this has strained the FHA’s capital and, indeed, in its official statement, the FHA alludes to this, stating that the MIP increase will “significantly strengthen” its reserves. By law, the FHA must maintain a certain minimum level of reserves.

FHA mortgage insurance varies by loan term, and by loan-to-value and, beginning April 18, 2011, the new insurance premiums are as follows:

• 15-year loan term, loan-to-value > 90% : 0.50% per year
• 15-year loan term, loan-to-value <= 90% : 0.25% per year
• 30-year loan term, loan-to-value > 95% : 1.15% per year
• 30-year loan term, loan-to-value <= 95% : 1.10% per year

To calculate your monthly mortgage insurance premium, multiply your starting loan size by your insurance premium, and divide by 12. 

There is no change planned to the 1 percent upfront mortgage insurance premium charged by the FHA.

For the second time this year, the FHA is modifying mortgage insurance.

Beginning with FHA case numbers issued on or after October 4, 2010, the FHA is changing its upfront and annual mortgage insurance premium structure.

Under the new terms, 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 in Oak Park and everywhere else , this switch in MIP decreases the upfront cost of an FHA-insured mortgage, but increases the loan’s long-term costs.

Using a $100,000 mortgage as an example, upfront MIP falls to $1,000 from $2,250; monthly MIP jumps to $70.83 from $41.67. The FHA expects the change will yield an additional $300 million in premiums monthly.

The update is a huge win for the FHA whose reserve funds are self-proclaimed to be “perilously low”.  The extra monies should help recapitalize and stabilize the government group.

The FHA is on pace to back 1.7 million loans this year.

For the majority of refinancing FHA homeowners and home buyers, the MIP change is neither good nor bad — the borrowing landscape will just looks a bit different.  Yes, loans will cost more to carry each month, but also they’ll be less expensive to procure. It’s a trade-off and you can apply math formulas to solve for the best time to apply FHA. 

It may be wise to get your FHA case number before October 4, for example, depending on your time frame in the home and the expected life of the mortgage. Or, it may be better to wait until after October 4 to apply.

If you’re unsure of how the new FHA mortgage premiums will impact your mortgage, be sure to call or email your loan officer for help.

NOTE : The FHA originally announced an implementation date of September 7. It was subsequently amended to October 4, 2010.

The most common first time home buyer loan program has become the FHA 30 Year Fixed in the past year or so.

In a statement issued yesterday, the Federal Housing Authority is changing the home loan approval guidelines and FHA loans will get a little more expensive.

In total, this is designed to reduce the overall risk of their portfolio and strengthen their overall financials.

For first time home buyers, the changes mean higher costs.

There are 3 major guideline updates for the FHA as listed in the official announcement:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum downpayments for applicants with sub-580 FICOs are rising to 10 percent
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

Additionally, the FHA has appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.

They are clearly trying to balance two competing objectives:  First, provide affordable loans to people that need it and, second, manage the risk that comes with insuring lesser-quality loans.

The most appealing change is the inclusion of a “termination clause” to remove the lenders who create a disproportionate amount of the bad loans.   That will help create a better overall loan pool (the good), but also mean that many lenders will have FHA home loan approval guidelines that exceed the minimum standards.  An example of this is that the FHA will buy a 580 FICO loan, but most lenders are requiring a 620 FICO or higher.

The new guidelines don’t go into effect until spring.  So, between now and then, the old guidelines and lower MIP charges will apply.

Fast-forward to three or four years ago, prices had skyrocketed as investors were buying 2-units with as little as 5% (eventually 0%!!!) down. The values weren’t as extreme as before. In fact, many were selling for more than the value of the cash-flow of the building. Many first-time homebuyers opted for the condo. It made sense.

Fast-forward to about one year ago: Rates were high, uncertainty was high, and the housing market had years of unsold inventory sitting idle. Values, values everywhere and nary a loan in sight.

Fast-forward to today: The Existing Home Supply has dropped significantly, the $8,000 tax credit continues to push a surge in home purchases, and mortgage rates continue to hover near 5%.

Home supplies are off 23% since November of 2008. We are consistently hearing that the remaining condominium inventory looks like a shopping rack after a massive sale. Thin.

If the 23% most desirable homes are now gone, where are all the values hiding?

Well, if what caused the quick drop in real estate prices was the lack of mortgage financing options effectively freezing the housing market, has the 2-flat become the savvy option again?

The supply has certainly not been picked through as hard as the condo market. While Fannie Mae has tightened up many guidelines, they’ve hit two groups the hardest:

• Credit scores between 620 and 739 have varying levels of extra fees
• 2-Units: now require a 20% down payment

This is a staggering reversal from Fannie Mae and has significantly reduced the amount of competition in the 2-flat market.

Enter the FHA 2-Unit

The FHA 2-Unit still only requires a 3.5% down payment. The rent from the subject property can be included in loan qualification calculations. The mortgage insurance varies from .5%-.55% based on down payment. The mortgage rates are not as credit-driven as Fannie Mae’s.

At today’s mortgage rates, rent of roughly $550/month supports roughly $100,000 of loan and mortgage insurance payment. A rental unit earning $1100/month supports nearly an additional $200,000 of loan and mortgage insurance payment. For many of our recent home loan approvals, the combined debt-to-income ratio was actually LOWER on the 2-unit than the condo.

While FHA Condominium Approvals are changing, the condo approval issues remain the same: Are there adequate reserves? Are there too many FHA loans in the building? Are there too many investors in the building? Is there too much commercial square footage? These are not questions for a 2-flat buyer.

Is a 2-flat the right option for you?

I saw something on CNN this morning: 63% of Americans said their personal finance habits would change “permanently” based on the lessons of this past year. Let’s protect our homes the way a home ought to be protected.

To make the 2-flat a conservative option, I’d assume 25% vacancy on the rental unit. That is to say, can I comfortably stomach the payment on my income plus 75% of the rental income?

To make the repairs and maintenance more easily budgeted, I’d set aside 1% of the value of the home annually for repairs. At some point the expenses will arise, this allows you to sleep easier.

To help me expect the unexpected, I’d reach six months principal, interest, taxes, and insurance in cash or equivalent as fast as possible.

Is the 2-flat a good idea? Yes, it’s a great idea. The difference between a great idea and a great decision depends on the planning and team of professionals. If you need a referral of a qualified Realtor who understands the multi-unit market or a financial planner to discuss the impact on your finances, contact us.

Chicago Mortgage Loan Option Comparison

I had an interesting comparison the other day and the numbers sort of surprised me. Notes:

• * The purchase price is ficticious, but these rates were real at the time that I was doing the math. Changes in mortgage rates would change the calculations in this post.  Check Current Chicago Mortgage Rates
• ** Payment Total disregards property taxes and insurance because they won’t vary based on the loan program. This is for illustrating the mortgage performance solely
• *** At closing disregards all fixed closing costs, transfer stamps, etc. This is solely attempting to isolate the impact of the Up-Front Mortgage Insurance Premium on the FHA loan versus the Fannie Mae / Freddie Mac Loan Level Price Adjustment on the Conforming Option

Results from Conforming and FHA Mortgage Calculators

I’m assuming a $200,000 purchase

Payment Edge:  FHA

Okay, so we have a slightly better payment with the FHA Loan ,but let’s look at the impact of that up-front mortgage insurance.  What we’ve done here is include any upfront interest payments, plus the mortgage insurance premium, plus the cumulative interest.  In other words, we’ve removed the cumulative principal to get a truer estimate of the total cost of the mortgage loan.  Results:

Total Costs Edge:  FHA by a nose. With rates unlikely to be this low in the next 0-60 month term, refinancing becomes less likely as a means to remove the PMI.

Which is the better loan option?

It depends.  For all the things that have changed in the past few years, we’re finally back to normal.  Mortgage loans are typically the largest household debt and are not one size fits all.  If you’re likely to be relocating, needing a larger home, or needing a smaller home in the next few years, then the Conforming loan may be a better fit.  If you’re in this home for 3+ years, FHA has become cool for the 700+ FICO crowd again.

Contact us for a personalized review of your financing needs.

Here’s a quick attempt on the FAQ’s:

Q: Did you use Taylor, Bean & Whitaker?

No.  Zero loans with us are impacting by this news.

Q: Taylor, Bean & Whitaker is my lender.  What do I do now?

Nothing changes.  The mortgage contract survives the shutdown of TBW’s future lending.  Continue making your payments to the address provided on the dates required until you hear differently in writing.

Q: My loan is in underwriting / cleared to close / scheduled to close.  Is everything fine?

No.  TBW has no capability to fund a loan and that loan application is no longer advancing.

Q: I closed and funded my home purchase last week, am I okay?

Yes.  Purchase loans that have funded are fine.  Pay attention to your mail as you may be receiving notification via USPS mail regarding any future changes of payment address.

Q: I closed on a refinance with TBW last week and it was scheduled to fund this week, am I okay?

No.  TBW is no longer funding mortgages.  Refinances have a three-day right of recission between closing and funding.  If you signed your paperwork at the title company on July 31, August 3, or August 4 your loan will not fund.  You’d need to start a new FHA mortgage application.

Q: Okay, I get it–any loan in process is terminated.  What do I do?

Start over.  Question #1 in today’s market should be:  “Do you fund your own loans at closing or does the end-lender?”

This not only influences the approval and underwriting control, but in today’s market (with 30,000 new FHA loans being resubmitted) it helps avoid a 60 day re-processing time.

Q: What’s the fastest way to get approved for a new FHA loan?

Contact us. We underwrite and fund our own FHA loans.