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Apr 03

FHA Changes Mortgage Insurance

This post expands on another recent post FHA Mortgage Changes.  On the way to the office this morning I thought about what opportunities may be created by the upcoming changes.  I focused on the increase in the Up Front Mortgage Insurance Premium (UFMIP).  This Friday 4/6/12 is the last work day to pull an FHA case number using the existing premium, currently 1% of the loan amount.  Case numbers pulled on Monday will use the new premium of 1.75%, a significant increase.  

Any big change creates an opportunity if we search hard enough.  This little slice of the mortgage terrain is weird even without the upcoming change.  In the last post it was compared to a premium on a home owner’s insurance policy regarding how the payments are collected.  It was also pointed out that the initial premium could be paid in cash at closing or financed in the mortgage.  

What I neglected to point out is that no matter how the initial installment is paid the entire amount can only come from one source.  In other words the borrower could choose to finance the entire amount or pay the entire amount at closing.  It cannot be split, half financed and half paid up front.  

 Another option would be the seller pays the entire amount from the proceeds of the sale.  Again, must be the entire amount, it can’t be split a portion to the seller and the rest to the buyer.  Somewhere in this mess is an opportunity for one side or the other.   Which brings us back to the math problem that claimed the morning commute.  I tried to determine if the buyer would be in a better position if the sale price of the home is reduced by 1.75% or if price stayed the same and the seller paid the 1.75% premium for the buyer.  Not exactly light fodder while in bumper-to-bumper traffic.  

The answer please, the buyer is slightly, very slightly better off if the sale price is reduced, because the price reduction also reduces the tax assessment.  The loan amount is slightly better with this option as well because the maximum loan amount is based on the smaller sale price.  Most people would see the small difference as swatting flies, nothing worthy of wasting quality commute solitude.  

Therein lies an opportunity.  Most people won’t think about the implications.  Looking at it from the buyer’s side, would a seller be more likely to accept a 1.75% price reduction or pay 1.75% of the buyer’s closing cost?  The result of either option to both parties is almost exactly the same.  But any experienced Realtor will testify to the fact that sometimes people just need to see things from a different perspective.

The same would be true from the seller’s side.  If the buyer offered 5% less than the asking price, would they be more likely to accept a counter from the seller at full price if the seller offered to pay the UFMIP?

 

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