Upcoming Changes with FHA Mortgages

Update October 27, 2008: many of the changes mentioned below have all ready changed!  Please visit Rain City Guide’s Mortgage Info page for the most current information.

I was just reading Brian Montgomery’s speech from yesterday which reminded me of what’s on the horizon with FHA insured mortgages.   He points out that the increased loan limits are temporary–you only have until the end of this year to take advantage of the increased loan limits and then *poof* this coach turns back into a pumpkin!  Instead of doing 3% down with a loan amount up to $567,500, if you’re buying in King County, the maximum loan amount for a single family dwelling will be $362,790.   This is really a window of opportunity that is closing (this window includes conforming jumbo, too).   I suspect that Congress will pass an extension to the loan limits…and IF they do, they may reduce the loan limit to somewhere between what is offered now to what the real loan limit is…this is a big IF.   For now, we just know that FHA-Jumbo (and conforming jumbo) are here until December 31, 2008.

Next month, FHA will start their risk based pricing for mortgage insurance.    This from Ken Harney’s recent article:

On 30-year mortgages with down payments of 10% or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25% of the loan amount upfront and annual renewal premium payments of 0.5%. Borrowers with down payments of less than 5% and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25% up front and 0.55% annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5% premiums upfront and 0.5% annually.

The difference in savings is not super significant for borrowers.   Using a loan amount of $360,000 and a rate of 6.5%, here’s how it pencils out for the credit scores above 680, 680-560 and 560 and below (who may have a tough time finding a lender regardless of FHA being willing to insure them.   Lenders have their own underwriting “over-lays”).

  • 680 plus with 10% down = upfront mi of 1.25% = $4,500.  $4500 plus $360,000 = $364,500.  Principal and interest = $2,303.89.  Monthly mortgage insurance @ 0.5% of the base loan amount = $1,800 divided by 12 months = $150.  $2,303.89 plus $150 = $2,453.90 (not including taxes and insurance) for the “preferred” FHA borrower.
  • Credit scores above 560 with less than 10% down (this is the current model) = upfront mi of 1.5% = $5,400.  $5400 plus $360k = $365,400.  Principal and interest = $2,309.58.  Mortgage insurance is the same rate as above, so the payment (not including taxes and insurance) is $2,459.58.   A difference of just over $5 based on this loan amount.
  • Credit score below 560 is going to have a different interest rate.  In fact, many lenders will not do FHA loans under 580.   Assuming a 559 credit score finds a lender, the upfront mi increases to 2.25% of the loan amount: $8,100 based on our example.   The rate would be significantly higher in addition to the increased mortgage insurance costs.

So, the moral of the story is that if you have credit scores 680 or better and 10% down, don’t wait until next month to take advantage of the improved mi pricing.  It’s not going to pencil out to the consumer as much as it will to FHA.   You’ll potentially lose any gain by the rising mortgage interest rates (which have gone up again today).

Watch out for Down Payment Assitance Programs which are on the endangered species list.   Even President Bush is on the bandwagon to do way with DAPS.  Quite frankly, I’ve never been a huge fan as I’ve witnessed sales prices being jacked up to absorb the cost the seller has to contribute to participate and structure the transaction…who does this impact?  The buyer.   The practice of increasing a sales price over the list price, like the do-do bird, probably wouldn’t fly in today’s market anyhow.   Home buyers utilizing FHA should count on investing 3% into the transaction (which can be a gift) and the seller can contribute up to 6%.   I do believe the down payment assistance programs days are numbered.   

I do hope that more people take advantage of the FHA Jumbo loans while they’re available for the remainder of this year.   As I’ve mentioned, they’re a great resource for people with less than 20% down and with Fannie Mae’s DU 7.0, I’m sure we’re going to be seeing more and more FHA financing.   Keep in mind that various lenders may have their own guidelines (3% vs 5% down w/FHA Jumbos, for example) in addition to those of FHA.

28 thoughts on “Upcoming Changes with FHA Mortgages

  1. I think FHA needs to keep the higher loan limits. One of the reasons subprime was so favored was the FHA limits were practically worthless in big cities. They also should allow 100% financing for QUALIFIED (720 ficos, low dti, reserves) borrowers and do away with the DPA programs. They also need to loosen some of the guidelines on condos…

  2. FHA needs to keep jumbo limits or sales prices will be reduced. {seesmic_video:{“url_thumbnail”:{“value”:”http://t.seesmic.com/thumbnail/Wf5AAyaCvH_th1.jpg”}”title”:{“value”:”FHA needs to keep jumbo limits or sales prices will be reduced. “}”videoUri”:{“value”:”http://www.seesmic.com/video/DYCtyh0TpO”}}}

  3. I can’t think of any compelling reason for FHA to keep the limits high, particularly when market prices have and are falling in a lot of counties across the country. I’m probably too conservative when it comes to lending but looking into the rear view mirror shows how well 100% financing has worked out.

    Jacking the prices up on DPA’s and 100% financed purchases in months past to offset buyer closing costs paid by seller was amazing to see, deal after deal, after deal after deal.

    The lending environment today is what creates and maintains stable markets and keeps people in the real estate industry employed and most important, keeps people in their homes.

  4. Tim:

    100% financing by itself is not what is causing the problems. It was 100% financing to investors, borrowers with spotty credit, borrowers going stated income, etc. That is why I said 100% financing to qualified borrowers. However, I guess since you only need 3% down, 100% isn’t that big of a need for FHA. I mean, if you can’t come up with a 3% down payment you probably shouldn’t be buying a house.

  5. I have not seen any recent stats, but I have heard that the FHA Jumbo’s have been slow to catch on. I think they need to coherently adjust the FHA loan limits permanently, and not just reserve that privileged status for Hawaii and Guam, and I believe Alaska. Something pegged to the actual median home price, maybe not all the way to 125%, but maybe 115%, and adjusting annually.

    What was in place was unworkable in major coastal markets and large metro areas.

    Foreclosure stats on FHA loans have not been looking so good, compared to prime fixed rate, but they have fared better than all other categories. That “might” be due to their structure, but it is just as likely that it is due to the lenders and originators who placed their borrowers in them, and rejected riskier (though simpler) solutions. No studies to back that up.

    Here’s a link to a recent study on delinquencies, broken out by loan type and area.


    Re the DAPS and near 100% purchase financing, lenders/underwriters (even FHA underwriters) are getting very aggressive on appraisals that they think are pushing values too high.

  6. I wonder if FHA is an even more valuable loan product than it was previously, especially with the higher loan limit. Consider a younger professional couple who make a combined six figure income, with minor debt. If they are only a few years into the job market, they haven’t had time to save up the 20% of the necessary amount to buy an average Seattle SFH that costs $500k. Maybe this is a result of the “instant gratification” mentalitiy, but attempting to save 20% of a $500k house seems overwhelming. Even frugal people are likely to have to buckle down for 4-5 years to achieve this, and then who knows where interest rates will be…..

    Yet, with interest rates below 7%, maybe said couple could easily manage the PITI payments of a $500k house, with only 3-5% down. And to me, coming up with 15-25k plus closing costs seems like a much more achievable goal in a reasonable time frame. So, with average prices in Seattle (even for local starter homes) exceeding the original FHA limit, I wonder just how bad of “sting” a rollback to original FHA limits will be to those well qualified buyers who have great credit, could afford the PITI payments, but simply don’t have $100k stuffed in a mattress somewhere…..

    Any guesses on what market share this FHA/jumbo represents? I really have no idea.

    You could say that the prices will drop dramatically as a result of rolling back the temporary caps, but I would think that it would just make the overall Seattle market worse since the percentage of people upside down would rise dramatically. And I’d be suprised if the onslaught of foreclosures and short sales actually brought prices down far enough to put the average Seattle SFH (starter home) under original FHA limits. Even in San Diego (where job market is much weaker), this isn’t happening.

    So, I agree with Rhonda. The limits should be extended as coming up with 20% down now for first time buyers is a totally different beast than it was in previous decades.

  7. Yeah, me too. West Seattle warbox, $107K. 8.5% fixed, 3% down, closing costs and DP came to about $7,900.

    Saved that by living in my sister’s basement for a year (1990).

    Thanks, sis!

    That’s a far cry from what folks would have to come up with now, especially since incomes have not tripled since 1990, like home prices have.

  8. I should maybe restate that as in anytime prior to the last 6 years for Seattle?

    Disclaimer: I come from Bay Area, where average SFH prices in 1992 were still around $300k (hence, “previous decades”)….

  9. Lesley:

    FHA market share will continue to rise.

    Important to note, there are still good alternatives to FHA at higher LTV’s (80-97%). It just requires a good loan originator to match the borrower to the product.

    Can’t say how long they will be around.

    Also, 1st timers with decent income can look at borrowing from 401K accounts. 1st timers with less than median incomes may qualify for many programs designed to assist them in homeownership.

    FHA’s main claim to fame previously was that it ignored FICO scores, and offered 97% financing without any additional hit to rate.

    The problems with FHA were: No stated income, no interest only, higher upfront loan costs, slower underwriting. Seem minor now.

  10. Lesley, you just described my client I met with this morning! 🙂 They have outstanding credit but are a little shy on downpayment with solid reliable jobs/income.

    Russ and Roger, I prefer to see some “skin” in the game (ie downpayment) however, if it’s a choice between totally zapping savings, I would also prefer 100% financing (like the Flex 100) over 97% with that 3% in savings for “just in case”.

    Tim, I’m going to do a follow up post on how dramatic this (rolling FHA Jumbo back) will be to home buyers in light of the tightening conforming market. It won’t be good for our area IMO, and many like ours.

    Ardell, I DID buy my first home using FHA for $62k in 1989???

  11. Mine was in 1982 🙂 Six months before I got married in July of 1983.

    We were both single professionals as Lesley described. My savings was in profit sharing and I didn’t want to pull it out and I bought the house FHA in my name only (control freak that I am) six months before we got married. He had an ex-wife and a child and I didn’t want my house to go to them, in part, if something happened to him early in the marriage. What can I say…I was a banker at the time. Just dotting my i’s and crossing my t’s.

  12. RE DAP, this from the WSJ.

    FHA Officials Seek to Ban Seller-Assisted Payments
    Wall Street Journal (06/10/08) P. A13 ; Corkery, Michael; Crittenden, Michael R.

    A public comment period on a proposed ban of seller-assisted down payments has been reopened by the FHA, following a preliminary injunction against the ban proposed by HUD last year. This kind of down payment is fronted by a charity or another third party and repaid by the seller, and there are concerns because federally insured mortgages involving such down payments are three times more likely than conventional loans to end up in foreclosure, according to FHA Commissioner Brian Montgomery. Mortgages with seller-assisted down payments rose to 35 percent of FHA loans from 5 percent over the past seven years, and they likely will account for a substantial portion of the $4.6 billion in loan losses expected by the FHA. “We are concerned about this business, because the substantial losses affect FHA’s bottom line and FHA’s ability to serve American citizens who need access to prime-rate home loans,” Montgomery stated during a June 9 speech at the National Press Club.

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  14. Roger, perhaps they needed to add a chart of just where the rising delinquencies are. Ie, are they in Cities with the largest level of foreclosures, and would that mean that people are upside down in their homes, and choosing not to make payments because of that?

  15. I mentioned that in a comment on his blog. I think there is a greater correlation of delinquencies related to declining property values than to ANY other attribute, and have seen several studies to corroborate that. Of course, this is a self-perpetuating cycle, so it’s a little difficult to definitively sort out the chicken and egg question.

    I would think that foreclosures would track pretty closely to delinquency data.

    The easy thumbnail conclusion is that people with an appreciating asset do not let that asset go easily, and that people that have equity in a declining asset will go to great lengths to preserve that equity.

  16. Kary:

    I wouldn’t say that FHA loans are 100% loans.

    FHA requires a 3% down payment.

    FHA allows gifts as a source of funds for down payment, but they have rules regarding those gifts.

    Generally, they are OK if those gifts come from family members, employers or community based charities. It CANNOT come from the seller, but the seller can contribute to closing costs.

    When the down payment is truly a gift, the buyer has 3% “instant equity”, at least in theory. These loans appear to be performing reasonably well.

    When the gift comes thru a “enabler” charity, such as Nehemiah, and the sales price is raised 3%, to allow the seller to “launder” the downpayment through Nehemiah, then you are correct, there is virtually no equity. These loans are performing poorly.

    There is pretty strong political support for these programs, and the main proponent of doing away with it is the FHA, which is seeing deliquencies in these 100% programs escalate.

    Since FHA is NOT a government giveaway, but is entirely supported by the premiums they charge, they should be allowed to curtail this program to ensure their OWN survival, and limit their losses from payouts on defaulting loans.

    It will be interesting to see what happens.

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  18. Roger, I apparently missed your post above until now. I would call these so called “charity” scams an exception to the 97% rule, effectively allowing 100%.

    I found this thread again because of this article in the Seattle Times.


    Spin, spin and more spin. They make these scams seem legitimate. They even claim that the higher defaults aren’t due to the programs, but due to the inflated price. Properties don’t go into default over a 3% difference in price!

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