It is very hard to determine the real culprits of the housing crisis of 2008-2010. Sure conventional lenders were making loans they should not have made. They were not thoroughly reviewing the financial strength of applicants and too often putting buyers in adjustable loans that adjusted good people right out of their homes. Add in potential appraisal issues, shady packaging of mortgage loans on wall street and a host of other factors and it becomes hard to put the finger on the real issue. One group that I believe was not a participant but a victim, was the FHA.
Their loan standards and their loan products did not dramatically change in the 2000s but there is no doubt they were hurt by the crisis. The market tanked around the country and at one point 1 out every 4 homeowners were under water. Dropping prices meant there were many, many FHA loans that went into foreclosure because people could not sell or lost their jobs in the ensuing recession.
In response to the housing crisis, government regulations were tightened and many agencies became extremely conservative in their approach. Every facet of the real estate industry has been impacted in the last few years. To me, most of the rule changes seem an overreaction but finally…finally…we are starting to some reversal of oppressive guidelines.
Leading the way is the FHA with 2 welcome changes to their policies. They have reduced their monthly mortgage insurance helping buyers and eliminated the extra interest sellers are required to pay at the settlement table. They had you coming and going. Now a little less on the front end. Before we get to the changes a little review….
HOW DOES FHA CHARGE MORTGAGE INSURANCE?
Upfront at loan origination. There are two fees charged on FHA loans. They charge an upfront fee as a percentage of the loan. Conventional loans do not have the upfront fee. VA loans do.
On a monthly basis. For all 30 year amortization loans FHA loans, regardless of down payment and regardless of your credit score, there is a monthly premium also charged as a percentage of the loan amount. The amount of the monthly premium varies just a tiny. tiny bit for loans with less than 5% down and more than 5% down but even with 50% down the fee will be charged.
The premium on conventional loans varies based on down payment and credit score. It is highest with 5% down, lower with 10% down, lower still with 15% down and there is no premium with 20% down. VA loans do not have a monthly insurance premium.
RECENT HISTORY OF MORTGAGE INSURANCE
The numbers below are for loans with less than 5% down. I believe the following numbers are accurate as it is bit hard to research. In any event, the direction of the premiums highlights the key issues.
At the start of 2008, the upfront was 1.5% of the loan and the monthly was 0.005%. Example: On a loan of $200,000 the buyer would actually borrow $$203,000 and on a monthly basis, they would pay $83 per month ( ($200,000 * .005)/12) )
7/14/2008 – The upfront changed to 2.25% and the monthly went up to .0055%
10/4/2010 – There was dramatic shift between upfront and the monthly. The upfront became 1% and the monthly jumped to .009% making it harder fro buyers to qualify
4/18/2011 – No change in the upfront but the monthly went to .0115
4/9/2012 – Upfront jumped to 1.75% and monthly to .0125%
4/1/2013 – No change in upfront but the monthly went to .0135% Now, on a $200,000 loan, the buyer would get a loan for $203,500 and the monthly premium would be $225 – $142 per month more than 2008.
THIS MONTH THE MONTHLY MORTGAGE PREMIUM WENT DOWN
Starting January 25, 2015, the monthly premium dropped back to .0085. There is no change in the upfront fee. So that $200,000 loan, the fee would now be $142 per month. That is a great improvement over $225 per month but still higher than 2008.
This is great news for low down borrowers and, really, for the FHA. The prior mortgage amounts had priced FHA out of the market. There were very few reason for a buyer to select FHA over conventional. So now….
IS FHA BETTER THAN CONVENTIONAL?
FHA has always made sense for a small group of buyers.
FHA will work with buyers with lower credit scores than conventional loans. For buyer with credit scores in the 600s, FHA may be the only option.
FHA also has a minimum down of 3.5%. There are some newer conventional products with 3% down but most start at 5% down so if cash is an issue,, again FHA may be best.
However if your down payment is larger than 5%, close comparison of FHA premiums is in order. If you are putting down 20% or more down, absolutely conventional is the right choice. Otherwise your credit score will drive conventional premiums so ask your loan officer to do a side by side comparison.
Recently I had a buyer with a credit score in the 600s. He easily qualified for a 3.5% down FHA loan. There was a possibility he could come up with another 1.5% down and switch to conventional loan. Under the old numbers this would have made sense. Now, though, because his credit score was in the 600s, the conventional monthly premium was higher than the new FHA premium.
ONE CAVEAT: The premiums on low down FHA loans will last for the LIFE of the loan. Conventional loan premiums will be removed when the loan to value drops below 78%. So if you think you will have the loan (not the house but the loan) for a very long time, it may be best to pay a little more monthly in mortgage insurance for a conventional loan now so you will pay nothing later.
LAST: A LITTLE HELP FOR SELLERS
Many sellers have paid an extra few hundred dollars or even thousand plus at settlement when they were paying off a FHA loan due to the quirky FHA payoff rules. That rule has been eliminated. Let me explain.
When you sell your home, at settlement, you pay interest from the last payment through the settlement date. If you settle on the 10th, you will pay 10 days of interest for that month as you were the owner. (Technically a few extra days gets collected because interest accrues until the lender receives the payoff.)
Prior to this month, not so with FHA.
They previously collected from the seller the ENTIRE month of interest for the month in which they received the payoff – not the settlement date but the date the loan was paid off.
Many homes settle in the last few days of the month as this reduces the buyer’s upfront costs. (At settlement, the buyer pays interest from the day of settlement to the end of the month so settling from the 25th to 30th saves them cash.
The FHA lender for a seller who settled on Friday January 30th would not receive the payoff until Monday February 2 or Tuesday February 3. Under the old rules, the seller would have been charged for all of February’s interest and mortgage insurance. Under the new rules, the charge would only be for 2 or 3 days in February which is how all other loans operate.
I hope these changes are signals that the markets are stabilizing and we can get back to more normal lending conditions.