Category Archive: Mortgage Insurance

Apr 29

FHA Changes Have little Impact

The recent changes to FHA’s mortgage insurance premiums have had little impact locally.  The largest change, an increase to the Up Front MI, nearly double the previous factor, has not slowed the number of FHA applications.  In fact, the number seems to be on the upswing. 

I do not have access to all of the stats in our market but my government applications have picked up the pace considerably.  As a percentage in the first quarter FHA slipped a little in my pipeline but only because of a spike in conventional applications.  The number of both types of loans saw a huge increase. 

Earlier this week a Realtor told me they will not allow their clients to use an FHA mortgage to finance a purchase.  My first thought was, “Good luck with that.” 

That’s half of my pipeline! 

My second thought was something I learned 30 plus years ago from Warren G. Harding, author of the book, “Trade Secrets of Exchanging.”  Warren asked me, “What is the value of a life preserver?  If you are drowning in the middle of the ocean it is worth a lot more than it was in the store.”

FHA is still one of the most affordable options available to homebuyers.    

 

     

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?

 

Mar 24

FHA Mortgage Changes

Collections

FHA recently announced they are making some changes next month that will impact homebuyers. Beginning April 1st the credit matrix is going to tighten up once again.  An FHA DE Underwriter told me Monday that she is losing some authority to make a judgment calls on open collection accounts including medical collections.

Currently all DE Underwriters can approve a mortgage application even when the credit report contains collections.  Medical collections were the most commonly overlooked blemish, especially if they were more than a year old and without recent updated activity.  After next week If the credit report shows more than a grand total of $1,000 in collections then any and all must be paid off in full before the loan can be funded. In the future this will kill many deals.

Five out of the last ten credit reports I reviewed contained collections that totaled more than the new thousand dollar limit.    Four of those individuals were approvable without paying off their open accounts.  Three of those four would not have been able to pay them off and still have enough money to close.  That is a big change!

FHA Mortgage Insurance Premiums

On April 9th the FHA up-front mortgage insurance premium nearly doubles.   The 9th is falls on a Monday so the preceding Friday, April 6th is the last day to grab a case number using the old premium.  There is a copy of the entire Mortgagee Letter in my Dropbox if you want to read about the other changes.

Even loan officers have a hard time understanding how this facet of the mortgage industry works.  FHA doesn’t actually lend money, they insure mortgages that are originated by lenders like banks and mortgage companies. If the borrower defaults on the mortgage then the FHA insurance kicks in an covers the lender’s loss.  FHA charges the borrower an insurance premium similar to how an insurance company does for a home owner’s policy.  Instead of covering fire damage to the actual house it covers a default by the borrower/homeowner.

The FHA mortgage insurance premiums are paid annually just like a home owner’s policy with one small twist.  The initial premium can either be paid in cash or financed into the loan amount. The current up-front premium is equal to 1% of the loan amount. On April 9th that factor jumps to 1.75%.

People in my area are screaming about the recent jump in the price of gasoline.  While that is bad, it didn’t jump 75% in one day!

Is it really a big deal?  Absolutely! On a mortgage of $200,000 that is a bump of $1,500 added to the loan amount.  Pay interest on that extra $1,500 on a thirty year mortgage and it is a very big deal.

My first concern was for the poor first-time homebuyer that is already struggling to qualify.  Some buyers will not be able to get the home they want because this  change will push their income to debt ratios out of whack.

Buying a property in Kentucky and want to be pre-approved for a mortgage and or tax credit? Visit my online application site or printand use this simple form to get started. If you prefer we can do it over the phone, call my direct line during normal office hours, (502) 753-4127.

Aug 16

FHA Changes Mortgage Insurance

This is a big change; on Oct 4, 2010 FHA will lower the up-front MIP factor from 2.25 to 1.00.  This sounds great but it isn’t necessarily the case.  The monthly factor will bump from .55 to either .85 – .90.
 
I ran an example based on an interest rate of 4.5% with a loan amount of $150,000.  The UFMIP drops from $3,375 to $1,550, a difference of $1,825.  However the monthly MIP at .85 instead of .55 jumps from $68.75 to $106.25 which is $37.25 higher per month. 
 
The net result is a monthly payment that is $26.72 a month higher under the new factors.  I have seen several first time home buyers balk over $10 a month.  Another issue is the higher payment will cause ratio problems for all of those that are right on the edge to begin with.  This is going to cause some buyers to be declined on ratios.  Really bad for those that have already been pre-approved but have not found a property yet.  They need to get that case number by 10/3.
 
The buyer is ahead until the 69th payment at which time they pass the cross over point, $1,825 / $26.72 = 68 months.  I know, I know, that is really simple way to look at it, but it is close. 

I do not understand the logic of the change.  Defaults usually happen early in the game so lowering the up front insurance does not seem like the right choice.  Interesting math problem.