Its official, the FHA have confirmed that FHA buyers will pay Mortgage Insurance for the Life of the Loan starting June 3rd 2013! The FHA confirmed these changes in a press release January 30th. This will dramatically increase the cost of FHA loans for consumers, as new buyers will pay FHA Mortgage Insurance Premiums or “MIP” for the life of the loan now rather than under current rules, whereby if the FHA borrower reaches 22% equity and a minimum of 5 years in the loan, they can remove the MIP.
FHA Buyers to Pay MIP for Life of Loan
So why is the FHA doing this? The FHA is going to help its bottom line and long term solvency by making 3 new changes to their current rules to increase revenue!
1. They are increasing monthly mortgage insurance payments again, this time by .10 basis points, so on a $400k mortgage that is an increase of $40 a month. This goes into effect on April 1st.
2. FHA will propose an increase in the minimum down payments for jumbo loans from 3.5% to 5%.
3. The FHA is eliminating MIP removal on loans where a buyer puts down less than 10%, so new buyers will pay FHA “MIP” for the life of the loan now. For loans in which the loan-to-value begins at 90% or less, mortgage insurance premiums must be paid for 11 years, up from 5 years previously.
Here is a chart that breaks down the current MIP rules versus the new FHA MIP rules. Any buyer putting down less than 10% (which the majority of FHA buyers do and why they use FHA in the first place) will pay this MIP now for the life of the loan.
You can read the rest of the FHA press release HERE released January 30th.
A Better Low Down Payment Alternative Than FHA
Because of this drastic change by the FHA in regards to paying MI for the life of the loan, never more than now do buyers need to look at low down payment alternatives to FHA financing. The best low down payment option available to buyers in this market right now, is the “3% or 5% Down Conventional Loan Program With NO Monthly Mortgage Insurance”. This is a terrific purchase option for buyers, as they can finance a home with a low down payment and they do NOT have to pay monthly mortgage insurance.
Here is a scenario below that compares a buyer purchasing a $400k home using the “Conventional 5% Down NO MI Purchase Option”, vs FHA with 3.5% down. On the left column is the conventional option. The buyer has a loan of $380k (5% down), and gets a rate of 3.75% on a 30 year fixed. The buyers total PITI (principle and interest, taxes and insurance) payment is $2,176 a month.
On the right side is the FHA option. The buyer has a loan of $386k (3.5% down) and gets a rate of 3.5% on a 30 year fixed. The buyers total PITI payment is $2,552 a month, which is an increase of $376 a month and $35k over the next 10 years!
Compare the savings on a $400k Conventional Purchase vs FHA
Over the next 10 years the conventional buyer saves $376 a month and $35k vs the FHA buyer. You can see below just how much more in interest and mortgage insurance the FHA buyer will pay in total over the next 10 years, compared to the conventional buyer.
In Summary. Instead of buyers going with FHA financing and paying the expensive mortgage insurance each month which will last the life of the loan, buyers should look into this 3% or 5% down conventional loan option to save extra money each month and over the life of their loan. As you can see above, the monthly savings are significant when choosing to finance their home with the conventional program, and buyers can turn around and put the extra savings into a college fund for their kids, or retirement, or back into the loan to pay it down faster.
If you are an FHA buyer that is looking to buy soon or who have been on the fence about buying, it would be a good idea to get into contract as soon as possible, so you can qualify under the current FHA mortgage insurance rules. Or if you have not looked into it yet, you should also learn more about the “3% or 5% Down Conventional Loan Program With NO Monthly Mortgage Insurance” to see if you can qualify. For a list of frequently asked questions that buyers have in regards to the Conventional 3% or 5% down NO MI loan option, see HERE
If you have any questions about these new FHA changes, or how to qualify for this Conventional 3% or 5% down program, please feel free to contact me directly at 858-200-9602.