Borrowing from Uncle Sam is about to get cheaper.
Thanks to the long-lasting economic expansion, Federal Housing Administration officials say they can now afford to cut the fees customers pay when they get FHA loans.
Those fees pay for federal insurance coverage that protects lenders against borrower defaults the same way private mortgage insurance, or PMI, protects lenders on conventional loans for 80 percent or more of a home’s value. As a result of the cuts, mortgage hunters should save an estimated $1 billion a year in purchasing costs.
“Now is the best time to buy a home,” says HUD secretary Andrew Cuomo. “The Homebuyer Savings Plan will lower the cost of homeownership and help families take a giant step toward sharing in the American dream.”
Making it easier
FHA loans help needy borrowers get into homes because they require as little as 3 percent down and have looser underwriting standards. The government does set mortgage limits that vary from market to market based on the price of homes in the area.
But since many FHA customers are first-time home buyers, minorities and others looking to purchase relatively inexpensive homes, the program remains a popular option. Last year, lenders originated about $1.29 trillion worth of residential mortgages, $122 billion of which were FHA loans, according to the Mortgage Bankers Association of America.
“Typically, FHA borrowers fall into one of three categories,” says Joe Szabo, a mortgage consultant with Columbus, Ohio-based Heartland Mortgage Corp. “They have had some minor credit problems in the past. They have very little in the way of down payment. Or, their (debt to income) ratios are slightly higher than would be approved on a conforming loan basis.”
Despite their popularity, FHA mortgages come with upfront insurance charges equal to 2.25 percent of the loan amount. They also carry annual premiums equal to 0.5 percent of the loan balance.
Though those premiums shrink as the loan balances are paid down, they can’t be eliminated the way PMI premiums can once customers reach certain equity levels. In a market such as Boston, where the maximum FHA loan amount is $218,500, someone could end up paying about $4,900 right off the bat, almost $1,100 in the first year and thousands more over the remaining 29 years, assuming an 8 percent interest rate.
Insurance fund full of money
HUD says the FHA insurance fund is in such good shape now that officials can cut back on those premiums without threatening the fund’s ability to cover lender losses. A Deloitte & Touche study released in March, for example, concluded that the fund had a capital adequacy ratio of 3.66 percent, almost double the 2 percent required by Congress. That means that for every $100 of mortgage insurance in force, the fund had $3.66 in cash on hand.
Beginning with mortgages closed on or after Jan. 1, the upfront premium will drop to 1.5 percent of the loan amount. On a 30-year loan, an FHA customer will be able to stop paying annual premiums after the loan balance has been paid down to 78 percent of the home’s original sale price or appraised value, provided at least five years of premium payments have been made. On loans with terms of 15 years or less and loan to value ratios of 90 percent or more, a borrower doesn’t need to wait half a decade to cancel. And on such short-term loans when the LTV ratio is less than 90 percent, annual premiums won’t be charged at all.
“Some of the people I’ve talked to recently say this has been a huge plus,” says Szabo. “When you compound the two programs, it obviously makes the FHA program even more attractive and more competitive with the competition.”
Current borrowers may get break, too
HUD is also working on a plan to refund some of the premiums paid by current borrowers. In the past, customers could get such “distributive shares” of the FHA fund if they stayed in their loans for several years and the insurance fund remained in good shape. But the government suspended refunds in the early 1990s because borrower defaults threatened the insurance fund’s financial stability.
Details about who qualifies for refunds and how to obtain them will be released within six months, according to FHA officials. Most likely, they will be paid when borrowers refinance their loans or sell their homes.
In the meantime, consumers who plan to buy with FHA financing may want to hold off for a bit. That way, their loans won’t close until after the first of the year when the new rules take effect.
“All things being equal, if they can work that out and they’re going through FHA financing, that’s wonderful,” says Rich Comparato, regional president with Irving, Texas-based First Horizon Home Loan Corp.
“All of this just helps,” he adds. “Anytime you make borrowing more affordable, it’s better for anybody.”