Category Archives: FHA

Changes in FHA premiums not good news for borrowers

I’ve always considered FHA loans great for people who are responsible with their money and who want to make the jump from renting to a modest home they can afford.  Unfortunately, FHA loans were almost entirely abandoned in the early and mid-2000’s when the subprime bubble was occuring. 

Recently, Matt Carter of Inman News reported on another not-so-consumer-friendly change to FHA loans.  Last April, FHA raised the upfront mortgage insurance premium from 1.75% (of the total amount of the loan) to 2.25%.  Monies collected from this premium are pooled into a fund to pay lenders in case the borrower defaults on the loan. 

Along with the up front premium, the borrower must pay a monthly mortgage insurance at a .55% yearly rate.  

Good news/bad news.   The good news is that Congress recently passed a law rolling back the up front premium (which usually gets rolled into the loan) to 1%.  The bad news is that the yearly rate for the monthly MI is going up to 1.55%.  What was supposed to be a break for borrowers at closing will now be a heavier burden on a monthly basis.  

Here’s an example……you purchase a property for $300,000.  If you put 3.5% down, your initial loan amount would be $289,500.  Roll in your up front MI premium at 2.25% and your new loan total would be $296,014.  If you had an interest rate of 4.75% on the 30-year fixed, with your current rate of monthly MI, your payment would be $1680 (minus taxes and insurance).  Under the new rates, your loan amount would be $292,395 (based on a 1% up front MI premium being rolled into your loan).  Your total payment with the monthly MI at a yearly rate of 1.55% would be $1,903, a $223 difference in the monthly payment. 

Now, come again on how this is going to help the borrower??

Originally this was supposed to take effect on September 7, but has been rolled back to October 4.  Stay tuned.


A head’s up on seller concessions on FHA loans

Although a specific date hasn’t been announced, Kenneth Harney of the Washington Post has reported that the FHA is planning to slash allowable seller concessions sometime this summer from the current rate of 6% to 3%.

This is not good news for buyers who may only have the cash for the 3.5% downpayment.   FHA is worrying about risk and current concessions “exposes the FHA to excess risk by creating incentives to inflate appraised value”.  Although they haven’t announced the specific date, FHA said it would be “early this summer” when they will announce the change.

Right now buyers can still have the concessions up to 6%, but like Harney mentions, they should be told that the clock is ticking on this.  The deals should be completed ASAP.

FHA ends the 90 day rule (for one year)

CNBC’s Diana Olick posted on her blog last week that the FHA is lifting its 90 day rule on flipping for one year.

Up to now, a buyer using FHA financing could not buy a home that had sold in the previous 90 days.  The FHA did not want to subsidizing flipping by real estate speculators.  They now realize that investors coming in and buying forclosures or short sales, rehab them and turn around and sell them to first-time homebuyers can actually be good thing.  

There are strings, however.  One condition is that the speculator(s) cannot make more than a 20% profit (in most cases).  Oh, and the transaction must be “arms-length”, no colluding with relatives on this one.

The Foreclosure Issue

We all need to face this, foreclosures are not going away anytime soon.  Alan Zibel of the AP confirmed this week that the Great Recession has brought with it high unemployment which is putting the squeeze on people trying to make their mortgage payments.  These aren’t people who bought something they couldn’t afford with a subprime loan.  These are the people losing their jobs and can’t make payments on A-paper (see 30-year fixed conventional) loans.  Add this to the many Option ARM loans resetting next year (and even more in 2011), and you’d be hard pressed not to admit that foreclosures won’t be a factor until 2012.

Kathleen Howley of Bloomberg throws her two cents in by adding that there are also increased losses on FHA loans.  To be fair, FHA loan guidelines are MUCH more strict than anything we saw in the subprime market.  Default is occuring due to high unemployment (and underemployment).

A great FHA loan program

Blaughridge over at talks about a little known but great loan program offered by FHA, the 203(k).   It’s a loan program (either fixed or adjustable) to rehab and purchase a property. 

Because of the condition of some bank owned and short sale properties, this program is becoming more and more popular.  I recently met a specialist who deals with these loans only and was willing to meet the buyers to go out the “property in question” and spend time answering questions about the property in relation to the loan program, telling them what they could or could not do with the funds for the rehab.

There are still opportunities out there, and this loan programs widens that field of opportunity.