FHA loans are Government backed loans, provided by the Federal Housing Administration (FHA), so they’re easier programs to qualify for when buying a house/condo/townhouse. To use an FHA loan to buy a property, you need a minimum credit score of 620, a minimum down-payment of 3.5% (for now), and you can qualify for one just 3 years after a foreclosure. Of course to make this loan product available, the Government must collect some money somehow to provide the insurance to lenders and that will be going up after October 4th.
As is standard in the industry for anything with less than a 20% down payment, there’s a monthly Mortgage Insurance Premium (commonly referred to as PMI) in addition to your actual mortgage payment. This is money you’re paying to insure your ability to repay the loan. In the unfortunate scenario you’re unable to repay, or a bank forecloses, the mortgage insurance company pays the lender for their loss. PMI rates vary (but the rate is currently 0.55 and will go to 0.90.) However, after October 4th, this monthly premium will be increasing by over 63%.
Specific to FHA loans, we have an Upfront Mortgage Insurance Premium, which is currently 2.25% of the loan value. Ex: A sales price of $500,000 with 3.5% down has a loan value of $482,500. Your Upfront Mortgage Insurance Premium on this loan would be $10,856.25. After October 4th, this will be reduced to 1% (or in this example: $4,825). Buyers can choose to pay the full amount at the time of closing in addition to their standard closing costs, or roll them into their monthly payments (amortize the amount over the life of their loan, ex: 30 years).
Note: Even with the upfront rate reduced, the monthly premium increase will INCREASE your overall payment/costs. Remember when I said I think the FHA is running of out money? Well….what do you think of this move?
Here’s an example courtesy of Gleyde Schatz, Senior Loan Officer with InterCoastal Mortgage:
Before October 4th a $350,000 purchase would require $20,997 in cash for closing with a mortgage payment of $2,211
After October 4th a $350,000 purchase would require $20,981 in cash for closing with a mortgage payment of $2,292
Some stats for how many people will be affected by this change:
In July, 23% of the sales were FHA loans in Arlington, while June was 22% and May was 28%. Numbers for Northern Virginia (Fairfax & Arlington County, Alexandria, Fairfax & Falls Church City) have similar numbers: 20%, 23%, and 28% respectively. (Statistics provided by MRIS.com, our local MLS provider). The National Average is 30%.