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.