Upcoming Changes to FHA Mortgages

In a recent press release, HUD has announced several changes coming soon to FHA mortgages. FHA mortgages are popular with home buyers because they allow for lower down payments (currently as low as 3.5%) and FHA mortgages tend to be more flexible with credit scoring and debt-to-income ratios. Another reason why home buyers may lean towards is an FHA mortgage in the greater Seattle area is because the allowed loan amount for a single family dwelling is $567,500 compared to $506,000 with a conforming mortgage.

Upcoming changes to FHA mortgages include:

  • FHA annual mortgage insurance (paid in the monthly mortgage payment) will increase by 10 basis points on FHA loans. FHA jumbos (loan amounts of $417,001 to $567,500 in King County) will see an increase of 5 basis points. This is effective with case numbers issued April 1, 2013 and later. 
  • FHA mortgage insurance to be permanent.  FHA mortgage insurance on loans with case numbers issued April 1, 2013 or later will have mortgage insurance on the life of the loan. FHA mortgage insurance on loans with case numbers issued prior to June 3, 2013 will still have their mortgage insurance terminate once it meets 78% loan to value and 60 payments have been made.
  • FHA annual mortgage insurance on 15 year amortized mortgages to be 45 basis points effective with case numbers issued June 3, 2013 and later.  Currently FHA mortgages with 15 year terms do not have annual mortgage insurance.
  • Manual underwriting for borrowers with credit scores below 620 and debt to income ratios exceeding 43%. This basically means that even if the automated underwriting system issues an approval – a borrower meeting this criteria will still need to have a human underwriter review the complete application and decide if she wants to sign their name to it.  I believe at our company, our lowest credit score we will accept for an FHA loan is 640.  This goes into effect with case numbers issued April 1, 2013 and later.
  • Minimum down payment to increase on FHA Jumbo mortgages to 5%.  Currently FHA jumbos have a minimum down payment requirement of 3.5%. In King, Snohomish and Pierce Counties, FHA loan amounts between $417,001 and $567,500 are considered to be FHA Jumbo. A mortgagee letter has not been issued yet (as of the publishing of this post) as to when this will happen.

The increases to FHA annual mortgage insurance premiums will not impact FHA streamlined refinances IF the existing underlying FHA mortgage was endorsed by HUD prior to June 1, 2009.   These lucky home owners still qualify for reduced FHA mortgage insurance premiums.

These changes are in effort to help bolster FHA’s capital reserves.  From HUD’s press release:

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said Galante.  “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

If you have been considering buying or refinancing using an FHA insured mortgage and have the ability to beat the April 1, 2013 date when many of the changes are taking place, I encourage you to do so!  FHA case numbers are issued after a bona fide application is in place. If you are in an FHA transaction during the April 1 date, you will want to confirm with your mortgage professional that you have an FHA case number.


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.

FHA Jumbo

Update 10/18/2008: This post was written in April 2008 and since then, many FHA guidelines have changed.  This post has been updated, however it’s very important to not rely 100% on mortgage information from what you read on the web.  Our guidelines are changing too quickly these days!  FHA Jumbo loan limits mentioned in this post are effective through 12/31/2008 and will be reduced to 115% of the median home value 1/1/2009 (estimated at $522,000).  Click here for an update on FHA guidelines.

Update 2/27/2009:  Lenders are applying a minimum credit score of 620 for FHA loans and the 2008 loan limits are returning.  Is it possible for me to chop up this post any more?

I thought it might be helpful to provide some information for you to use for when I quote rates on Friday for the FHA Jumbo mortgage. There are other criteria to be considered beyond looking at the rate. You may not have considered FHA before due to loan limits, now it’s more attractive: how else can you buy a home priced at $584,000 with 3% down and credit scores below 720?

FHA Mortgage Insurance

FHA charges both upfront and monthly mortgage insurance regardless of how much money you’re putting down. Seriously, if you’re putting 50% down and using an FHA insured mortgage, you’re paying mortgage insurance. FHA mortgage insurance does not cancel out automatically when your home has an 80% loan to value. You will pay the FHA mortgage insurance for a minimum of 5 years and 78% of the original value (lesser of sales price or appraised value) of the home.

Upfront Mortgage Insurance

Upfront mortgage insurance for a FHA insured mortgage is 1.5% 1.75% of the loan amount for a purchase. With an FHA mortgage, you have a base loan amount and the adjusted loan amount (after you add in the upfront mortgage insurance). For example, if your base loan amount is at the current King, Snohomish and Pierce County level of $567,500, your adjusted loan amount will be $576,012 $577,431 (567,500 plus 1.5% or 8,512 1.75% or 9,931) . Once upon a time, FHA upfront mortgage insurance could be refunded if the mortgage was terminated early with a balance of the mortgage insurance premium remaining, this is no longer the case for new FHA mortgages (which I believe is part of the reason FHA fell from favor during the subprime boom). The adjusted loan amount is what your principal and interest payment is based on. So if the rate going for a FHA Jumbo was 6.500% (this is not a rate quote; this is for example only), the principal and interest payment would be $3,640.79 $3,649.76 (576012 577,431 amortized for 30 years at 6.5%).

Monthly Mortgage Insurance

Yes…as if paying that 1.5% 1.75% upfront MI wasn’t enough…FHA has monthly mortgage insurance as well…the good news is that it is at a low rate compared to traditional private mortgage insurance (especially factoring in a jumbo loan amount, higher loan to value and credit scores below 720). The rate for FHA mortgage insurance is 0.5% 0.55% (for a purchase) of the base loan amount. Using our current example, your monthly mortgage insurance would be $236.46 $260.10 (base loan amount = 567,500 x 0.5% 0.55% divided by 12).

FHA is a fully documented mortgage loan. You will need to provide 2 years of W2s (tax returns if self employed) and your most recent paystubs covering 30 days of income. Any gaps of employment during the past 24 months will need to be explained. There are no income limitations and the DTI is roughly 43%.

Low Down Payment

FHA Jumbos allow for as little as a 3% 3.5% down payment. This means you could be a home priced around $585,000 with the base loan amount of $567,500. Your down payment must be fully sourced and seasoned. Be prepared to hand over your last 2-3 months of bank statements and any asset accounts (all pages) and to explain any large deposits that are not from your source of income.    The Seller may contribute up to 6% towards closing costs however the buyer has a minimum investment required of 3% 3.5%. Family members can gift funds towards closing costs as well which counts towards the buyer’s required 3% 3.5%.

Update: Effective January 1, 2009, the minimum down payment will be increased to 3.5%.

Speaking of documentation…

I’ve covered FHA before…and the guidelines for traditional FHA are pretty true for the temporary Jumbo FHA mortgages as well. Here are a few more pointers for our current market:

* FHA does not have price or loan to value limits for geographical areas determined to be soft or declining.

 * FHA does not have credit score risked based pricing for credit scores above 620. (Lenders may have their own risk based pricing for credit scores under 620).

Sellers with homes priced around the new FHA jumbo loan limits should consider buyers utilizing FHA financing. A sales price of $584,000 would allow for a minimum down FHA insured mortgage. However a home buyer could always use more towards down payment and opt for a FHA mortgage meaning that if your home is priced higher, you may still want to consider allowing FHA buyers as they may be considering FHA over the price hits conforming has if their score is below 720.

Condo’s are acceptable for FHA financing as well. They may not be on the FHA approved list, however, if the condo meets the requirements for a “spot approval”, they can still qualify for FHA financing.

Act fast…FHA Jumbo is only here until December 31, 2008.  loan limits will be slightly reduced on January 1, 2009.