President Barack Obama announced on January 7, 2015 that the Federal Housing Administration (FHA) would lower its annual mortgage insurance premiums from 1.35% to .85% (for loan to values above 95%). Although a date has not yet been announced for when this will go into effect, the lower mortgage insurance drop is fairly significant.
FHA Mortgage Insurance Has Increased 4 Times Since 2010
Since 2010, when the annual mortgage insurance premiums (which are paid on a monthly basis) were only .55% for loans over 95% loan to value, the MI has increased four times. In October 2010 the rate increased from .55% to .9%; in April 2011 it increased to 1.15%; in June 2012 it increased to 1.25%; and in April 2013 it increased to where we are now at 1.35%. If someone were to buy a condo in Irvine, CA with a $400,000 FHA loan in 2010, their mortgage insurance payment would have been (approximately) $183 per month. If someone bought a condo in Irvine with a $400,000 FHA loan in 2014 their mortgage insurance payment would have been (approximately) $450 per month. That comes to a $267 increase on a monthly basis for mortgage insurance on a $400,000 loan, which not only made qualifying more difficult, but also made FHA a less attractive loan program as other Conventional programs began to come back.
How Much Will .85% Help with Orange County Affordability?
With the mortgage insurance rate going back down to .85%, FHA will again be a competitive loan product. That $400,000 FHA loan will have a mortgage insurance payment of approximately $283 per month, a savings of $166 per month for those who get an FHA loan after the drop goes into effect. If someone today (before the lower rate takes effect) wanted to try and lower their payment on a $400,000 loan by $166 per month, they would need to get an interest rate that is nearly .75% lower. For example, a $400,000 loan at 3.75% would have a principal and interest payment of $1,852. The FHA mortgage insurance at 1.35% would be (approximately) $450, for a combined PI + MI of $2,302. With the lower MI of .85% the combined PI + MI would be only (approximately) $2,135. (It's important to note that these calculations do not include the property taxes and home owners insurance, which are also part of the total FHA mortgage payment.) For this example, if we assume that the buyer needed to get their PI+MI down to $2,135 in order to qualify but were not able to take advantage of the lower MI, then they would need to either "buy" the interest rate down to 3% (a .75% rate drop), or take the loan amount down to $371,000. For someone looking to purchase a home in the $350,000 to $400,000 price range, this mortgage insurance drop will result in approximately an extra $30,000 in home affordability.
Other Home Loan Options
Determining which loan program is best for a buyer is not easy. It's definitely not one size fits all. Even Orange County home buyers looking to buy with less than 10% down will be pleasantly surprised at the home loan options available now, both FHA and Conventional. Even with the higher 1.35% mortgage insurance rate FHA was the loan of choice for many buyers. FHA is fairly flexible when it comes to seasoning after a bankruptcy (2 years) or foreclosure/short sale (3 years) compared to Conventional (3 years for BK and 7 years for foreclosure). Also, FHA is a fairly good option, if not the only option, for buyers needing loans above $417,000 when the down payment is less than 10% of the purchase price.
The best way to determine what program is best is to talk with an Orange County Loan Officer before you begin the home search. The loan officer should be able to provide custom loan scenarios along with a Side by Side Total Cost Analysis, educating the buyer on the loan options available that will meet their long and short term financial goals and budget.
Authored by Tim Storm, a California Mortgage Loan Officer MLO 223456 – Please contact my office at the Fairway Independent Mortgage Corporation. Direct line at 949-640-3102. www.OrangeCountyFHAExpert.com. I prepare custom FHA loan scenarios which will be matched up to your financial goals, both long and short term. I also prepare a Video Explanation of your scenarios so that you are able to fully understand the numbers BEFORE you have started the loan process.