FHA Mortgage Insurance To Fall For First-Time Buyers?
Earlier this year, the FHA raised upfront mortgage insurance premiums to 1.75% of the amount borrowed, due at closing; and raised annual mortgage insurance premiums to as high as 1.25% per year.
For homeowners in high-cost areas such as Orange County, California with mortgages in excess of $625,500, the FHA tacks on another 0.25% in MIP per year.
What was once considered an "affordability product" has suddenly become quite expensive -- especially for first-time home buyers.
This is one reason why Representative Karen Bass, D-California has introduced a bill (H.R. 5884), which is sponsored by Representative Robert J. Dold, R-Illinois and Luis V. Gutierrez, D-Illinois, and which is meant to help make FHA mortgages more affordable for first-time home buyers.
The bill is listed in Open Congress as :
H.R.5884 - To establish a 1-year pilot program to reduce up-front premiums on FHA mortgage insurance for first-time homebuyers who complete a homeownership counseling program and thereby help to reduce default rates on residential mortgages.
To qualify, first-time buyers would only have to complete a home ownership counseling program. The reward would be lower FHA mortgage insurance rates.
FHA Mortgage : 3.5% Downpayment Allowed
The FHA has gained market share this decade, in part, because it offers one of the few, true low-downpayment mortgage programs. The FHA only requires a 3.5% downpayment at the time of closing, so long as the amount borrowed does not exceed local loan limits.
It's an advantage that the FHA has over comparable loan programs from Fannie Mae or Freddie Mac which are typically 5% down, at minimum, and often 10% or more. One reason that the FHA can afford to take "risks" on low downpayments is because it's a self-funded organization. FHA-backed borrowers pay mortgage insurance to the FHA, and the FHA uses those premiums to stay in business.
Unfortunately, as the number of FHA loans in default has climbed, so have FHA mortgage insurance rates. Today's rates can be 3 times as high as what they were in 2008. Back then, a homeowner in Loudoun County, Virginia may have paid 0.5% annually to the FHA for mortgage insurance -- $500 per $100,000 borrowed.
Today, that same homeowner's annual MIP could be as high as 1.50%.
Priming The FHA Pump For Housing
H.R. 5884 is not the first FHA-related bill to come through Congress. There's also talk of a HARP 3 program, and the FHA is believed to play a big role in its rollout. And, because the FHA can recapitalize itself via mortgage insurance, it's likely that the FHA's name will come up time and again as housing gets back on its feet.
For first-time buyers, though, the FHA may offer a chance a mortgage "on the cheap". As everyone else's mortgage insurance rates go up, for first-time buyers, FHA mortgage insurance rates could go down.