2013 FHA Mortgage Insurance Changes

FHA Mortgage Insurance Changes

Were you getting comfortable with FHA mortgage guidelines?  Yes?  Well then that means it is time for some change!  FHA released some big news in their “Annual Report To Congress” on November 16, 2012.  The 57 page report outlined several noteworthy proposed alterations the world of FHA mortgages.  The change is predicated upon HUD’s need to “beef up” the FHA mortgage insurance fund in order to be able to withstand expected losses going forward and to reduce its’ market share as private capital seeps back into the mortgage market.  2 changes that stood out to me more than any others were:

1. An increase in the cost of an FHA’s monthly mortgage insurance

2. A change in FHA policy which makes it so that FHA mortgage insurance does NOT ever go away (unless FHA borrower refinances out of FHA loan)

While these changes are both expected in 2013 no exact date has been released.

As you can see, neither of these changes are minor.   Both (especially #2) will alter the Arizona FHA mortgage landscape.  According to the data and opinions released in HUD’s annual report these changes are sparked by HUD’s fear that FHA’s mortgage insurance fund is in jeopardy.  However, the most interesting part is that current and more recently originated FHA mortgages are not the issue.  No, in fact previous changes similar to the 2 outlined in this article (tightening FHA credit guides and additional FHA mortgage insurance cost increases) have made it so that fewer and fewer FHA loans are going into default today.  One supporting fact that proves this is that 2012 saw the fewest FHA loans closed in terms of dollar volume however FHA saw its highest profit since 2007 (largely due to the previous increases to FHA’s mortgage insurance costs to homeowners).

Instead, HUD’s concern is that “older” FHA loans that are currently on the books (especially those originated between 2007 and 2009) are likely to cost FHA big bucks in the near future.  HUD predicts that FHA loans closed prior to 2010 (particularly 2007 and 2009) are going to cost FHA more than $70 billion in insurance claims.  These insurance claims are made against the fund when homeowners default on their FHA mortgage commitment.  The insurance fund is created and maintained with revenue that FHA homeowners pay in the form of upfront/one-time and monthly mortgage insurance premiums.

What Was so Different Prior to 2012 That is Causing FHA Trouble Now?

This may sound crazy considering today’s Arizona FHA mortgage environment but there was a time (pre-2010) where a seller could pay for an FHA buyers down payment.  Considering the fact that a seller could also pay all the closing costs on a transaction, an FHA buyer could purchase a home with absolutely no money out of their own pocket and without demonstrating any ability to responsibly save/budget (2 things that every homeowner should know how to do).  Currently, loans that had the down payment paid for by the seller represent only 4% of all outstanding FHA loans however they make up 13% of all seriously delinquent FHA mortgages.  This is one example of how pre-2010 FHA was quite different from post-2010 FHA.

Since 2010, FHA has consistently tightened its guidelines (including the elimination of seller paid down payment assistance) in an effort to help reduce the number of FHA loan defaults.   These new changes are yet another step in that same direction albeit a somewhat drastic step.   Many argue that FHA is going to far with these new guidelines.  While I don’t necessarily disagree let’s break down how these changes will actually impact an FHA home buyer.

Change 1:

Increase of 10 basis points to a buyer’s monthly FHA mortgage insurance payment
This change will cost an FHA buyer $17 per month based on a $200,000 loan amount.  FHA monthly mortgage insurance would increase from $208 per month to $225  per month as a result of the increase.

Change 2:

Making it so that an FHA home buyer can never eliminate monthly mortgage insurance without refinancing out of an FHA loan
This change sounds much more “brutal” than it really may be.  The level of impact this change will actually have will ultimately depend on an FHA buyer’s ability to refinance out of their FHA loan into a Conventional home loan.  As long as the FHA homeowner meets the following criteria they may likely have an option to eliminate monthly mortgage insurance:

  • 1. Conventional loan credit requirements (these standards are higher than FHA credit standards)
  • 2. Acceptable equity position requirements (in many cases a homeowner only needs 6% to 10% in equity to eliminate monthly mortgage insurance)
  • 3. Conventional loan debt to income ratio requirements (Conventional debt to income ratios are lower than FHA – Conventional typically allows a borrower to have 45% of their gross monthly income in monthly debt while FHA typically allows a borrower to have 57% of their gross monthly income in monthly debt)
    There are other differences between FHA and Conventional guidelines – these 3 are the most significant

The bigger concern with this is rising mortgage interest rates.  If rates jump significantly, the fact that a homeowner must refinance to eliminate mortgage insurance may reduce their post-refi savings.  If rates get high enough, it may eliminate any/all savings even if mortgage insurance is eliminated.

What will Buyer’s Need to do After These Changes?

If FHA is still their best / only option than that is a great way to go.  My buyer consultations do and will continue to clearly describe how FHA’s mortgage insurance policies work to make sure each client of mine is properly educated.  If FHA is a buyer’s only option then so be it and we will be very thankful such a great program exists.  After-all, FHA will still serve it’s very important and longstanding purpose in our Real Estate market.  What is that purpose?   The role of FHA is to help potential Arizona home-buyers achieve the American dream when no other home loan program can do so.  A noble purpose indeed.  Many of these home-buyers are first timers (75% of FHA buyers are first time home buyers).  It is also worth noting that FHA also almost single handedly helped our housing market stay afloat and recover after the housing crisis hit.

The biggest change after these changes will be in preparing buyers.  After-all, there are mortgage options that require less money down than FHA and offer more favorable terms  (as little as 3% and lower mortgage insurance costs).  The big difference is that a buyer needs stronger credit and a lower debt to income ratio to qualify for a 3% down Conventional loan.   Qualifying for a Conventional loan also becomes easier when a buyer makes a larger down payment.  So naturally, another reactive and evolutionary home buyer development will likely be to save a little more money before taking the Arizona home buying plunge.  If a buyer can prepare themselves for a mortgage that is less costly than FHA that is the best plan.  However, if they cannot they can still use FHA to get into a home and look for additional alternative options a little further down the road.

At the end of the day, there are always options and solutions to any change (even those the mortgage industry has doled out in recent years).   One silent agent of change that will continue to open up more and more options for homeowners is the fact that other mortgage program guidelines are starting lighten up a bit.   We have started to see Conventional guidelines show very real signs that the mortgage guidelines pendulum swaying back toward reality a bit.  More to come on that as things develop.

Please let me know if you have any questions or thoughts on this.  I would love to hear them!

By Jeremy House
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  1. […] wanted to follow-up on yesterday’s post on the important upcoming FHA Changes to share a few significant statistics that were released int the Annual Report to Congress […]

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