Summary of Recent Changes in the FHA Loan Program

Over the past few weeks we’re received a lot of questions regarding the recent changes to the FHA loan program. I might as well address some of these questions and concerns publicly. The changes are due to the recently signed Housing and Economic Recovery Act of 2008.

Changes to the down payment requirement: The minimum down payment requirement will increase from 3% to 3.5% starting October 1, 2008. To take advantage of the 3% down payment contracts must be dated before September 15th, underwriting approvals must be made before the 22nd and loans must fund by the 30th. Now, not only is the down payment requirements increasing, but H.R.3221 eliminates down payment assistance programs all together. I personally, don’t understand the reasoning behind this but then again it’s the government.

Status of the Upfront Mortgage Insurance Premium: HUD had recently made the FHA Upfront mortgage insurance risk-based. Meaning you paid more if you had worse credit. Now with the new bill H.R. 3221, there is a one year moratorium on these changes. In the mean time FHA will revert back to the single 1.5% premium charge.

New FHA loan limits: The new FHA loan limit will be the lesser of 115% of median sales price for your area or $625,500 but no lower than $271,050.  The median sales price this will be based on will not be published by HUD until November. We do know that if your loan limit since March has been higher than $271,050, the only way your loan limit will not be lower starting January 1 is if your area home prices have been having a significant rise (not true of hardly any area).  However, we don’t know what the new loan limit will be for sure until FHA does their math, only that it will be somewhere between the floor of $271,050 and the cap of $625,500.

Bottom line is that if you are planning a home purchase and would need a FHA loan, then you need to be aware that the loan limits will most likely be falling and the down payment amount will be rising after the first of the year. In essence, might as well purchase before end of the year.

$7500 tax credit: The recently signed bill provides a $7,500 tax credit for first-time homebuyers that will expire July 1, 2009, must be repaid over 15 years — making it, in effect, an interest free loan. First-time home buyers are defined as those who have not had an ownership interest in a real estate property in the past three years. North Phoenix Agent, Heather Barr, has a great post on her blog with details on this tax credit.

As you can see there are lots of changes in the industry. If you are in the market for a FHA loan, my best advice is ask lots of questions.

FHA Mortgage Insurance Rates Now Risk Based

Major changes go into affect on the FHA loan program on Monday July 14, 2008. These changes are very significant and will impact the affordability of these loans for many borrowers, especially those will less than stellar credit who can’t put 5% down. Basically, almost everybody in todays market.

Essentially, the Upfront Mortgage Insurance Premium (UFMIP)and monthly Mortgage Insurance IMI) will now be risk based. Even though the borrower has the option to pay UFMIP in cash upfront, it is typically financed into the loan. Bear in mind that UFMIP is not part of the regular closing costs. FHA has always charged a flat upfront mortgage insurance premium for every borrower regardless of credit risk. Until last week UFMIP on the 30 year fixed FHA loan was at 1.5%. The monthly mortgage insurance payment has also always been fixed at 0.5% for the 30 Year loan. These percentages will now change effective Monday.

UFMIP will now be charged on a risk basis, i.e., based on your credit score. It will range from 1.25% for lower-risk borrowers to 2.25% for riskier borrowers. In dollar terms this means that on a $200,000 loan UFMIP can range from $2,500 to $4,500. Remember this is on top of the closing costs and down payment already due. Since this can be financed into the loan, your final loan amount will reflect this cost. Having poor credit will now be expensive even on FHA loans.

Monthly mortgage insurance will vary from 0.5% and 0.55% and is determined by the loan to value. If you are putting less than 5% down than its set to 0.55% but if you’re putting more than 5% down it will be 0.5%. Monthly mortgage insurance is calculated by multiplying the percentage to the loan amount and dividing by twelve. So on a $200,000 loan and a MI rate of 0.55% your monthly mortgage insurance payment is $83.34.

First time home buyers who fall in the hefty 2.25% UFMIP bracket do have a way to obtain a slight reduction to UFMIP. If you are borrowing more than 95% of the purchase price (loan to value) and your credit score is below 559 then you may be eligible for a reduction in your UFMIP by 0.25% – so it would be 2.00%. However, you need to complete a HUD-approved pre-purchase counseling session. FHA will only provide the discount after you have successfully completed the course and will ask for a certificate of completion.

Additional Reading on FHA: Is the FHA Loan Program Right For Me?

Relevant FHA Down Payment Assistance related posts on other blogs:

Arizona Republic Article on DPA
Dear HUD, Stop Being a Bully
Real Estate Road Signs – “Buy A House for $500 Down”

Down Payment Assistance Programs

Monthly Mortgage Insurance and Other VA Loan Features

Shannon Hubbard from BlogArizona.Com left a really great comment on my post “The VA Loan: Perfect 100% Home Financing for Veterans“. I had always intended to follow upon on these points but she covered it for me. So, I’m going to use her comment and elaborate where I may be able to add  some value.

The VA Funding Fee

The only thing I don’t like about VA loans is that you have to pay a funding fee of around 2-3% (it varies depending on your circumstances, and I haven’t kept up with it, so don’t quote me on that number!).

She’s right. The VA does charge a funding fee and it varies depending on how much you put down, if this is the first or second time you’re using the VA loan and whether it’s for a purchase or a refinance. For example, if you are doing a  purchase with no money down then you’re looking at 2.00% fee, and its 2.75% if you’re a Reserve/National Guard vet.

If you are using the VA loan for a second time and are not putting less than 5% down, then your funding fee is 3.00%.  Refinancing an existing VA loan only costs your 0.5%, but if you’re refinancing from a non-VA mortgage then the charges are exactly that of a purchase. There are additional variances as well, so make sure to review them with your lender as you discuss the costs of the loan.

Regarding the funding fee Shannon makes a good point in her comments:

The funding fee can be financed into the loan, so you don’t have to pay it up 
front. But veterans who have a service connected disability do NOT have to pay the  funding fee.

This is an important point. The VA certificate of eligibility will specify the kind of disability you have and consequently you may not be required to pay the funding fee. I recently was able to do this for a borrower. It saved them thousands of dollars.

No Monthly Mortgage Insurance on VA

…with a FHA 3% down loan, I think you still have to pay mortgage insurance, which you don’t with a VA loan…

This is an important distinction for the VA loan. With the FHA loan you have to pay monthly mortgage insurance regardless of how much your are putting down (unless it’s a 15-year loan). With the VA you do not have to pay monthly mortgage insurance. So, I guess the hefty funding fee is used to insurance the loan and relieve the borrower of a monthly obligation. A nice benefit if you’re torn between an FHA and VA loan.

Regarding Appraisals

Also, as you mentioned, the appraisal standard is a bit tighter with VA loans. VA appraisals look more closely at certain aspects of the property’s condition. The main things I see VA appraisers call out are broken windows and peeling exterior paint.

When it comes to the Appraisal the VA works a bit differently. Once we have the loan application complete we notify the VA office for an appraisal. They will then assign their own appraiser. The lender has no ability to influence the selection. Additionally, the VA frowns upon lenders or real estate agents contacting the appraiser once the appraisal has been completed. Consequently the appraisal is also tighter with more annotations, notes and observations. The VA is very careful about this and likes to make sure the collateral is in great shape.

I want to thank Shannon for taking the time to comment and also for spurring this conversation. For those who dont’t know, Shannon and her husband Scott are great home inspectors. You should head on over to their blog to learn more.

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