Big Changes for FHA -Insured Loans

Brief Background

 FHA-insured loans began during the Great Depression.   During this time foreclosure rates skyrocketed and left lenders holding all of the bad debt.. The FHA-insured loan was created to protect lenders from losses should the economy once again tank.  FHA-Insured loans were not created to help low to moderate income borrowers.

Benefits for the Borrower

There are still of couple of benefits that can make an FHA-insured loan attractive to some buyers. FHA-insured loans require that a very detailed and specific inspection be preformed before insuring the home.  In addition, the borrower can buy a home with a lower down payment and sometimes a lower interest rates.

Eligibility Requirements

Conventional lenders are loaning money directly to the borrower.  Whereas, Federal Housing Administration  isn’t directly loaning the money, the administration is insuring the loan based on the borrower’s credit profile.

Recent FHA changes call for a manual review of applicants with credit scores below 620 and debt-to-income ratios of 42 percent or higher. While these conditions don’t automatically disqualify a borrower, it does decrease the number of applicants who qualify.

Statistics show that successful FHA applicants in August of 2013 had an average FICO score of 691, according to Unsuccessful applicants had an average FICO score of 667.

However,  the lender may have stricter requirements, so it’s always a good idea to review  your credit report before applying for a mortgage.

The Down Payment

Many borrowers love the lower down payment requirements of an FHA- Insured loan – as low as 3.5 percent of the purchase price of the home.  Most conventional lenders require a minimum of 5 percent to 10 per down.

Mortgage Insurance

Private Mortgage Insurance (PMI) is a  policy that homeowners  pay for but derive no benefit from. PMI protects the lender in case the borrower defaults.

FHA-insured loans also mandate mortgage insurance, but it’s known as the Mortgage Insurance Premium (MIP) instead of PMI. As with PMI, FHA at one time allowed borrowers with a 78 percent loan balance to cancel their mortgage insurance premium. As of June of this year, however, that changed.

New FHA borrowers (since June 3, 2013) with low down payments (a starting loan balance of more than 90 percent of the value of the home) must pay for MIP as long as they have the loan. Borrowers with balances lower than 90 percent can choose to stop paying for MIP after 11 years.

In April of this year FHA announced that they would be raising MIP premiums by 10 basis points, making the FHA-insured loan far less attractive than it once was.

Since every home buyer is unique there isn’t a “one fits all” program when it comes to a mortgage.  An FHA-insured loan can still be a good option for many borrowers.