If you have that American dream of owning your own home or if you’re just tired of paying rent, there’s good news. Buying a home may not now cost you as much as it used to.
It’s all about FHA mortgage insurance
FHA mortgage insurance is to protect the government if you were to default on your loan. It’s about to be reduced from 1.35% of a loan’s value to 0.85%. What this translates into is if you were to purchase a home for $100,000, your FHA mortgage insurance would have cost you roughly $1350 while it will now cost you $850. However, on the average a first time homebuyer will save about $900 a year on his or her mortgage payments.
Shut out of home ownership
The FHA decided to make this change based on the fact that many families that are credit worthy and want to buy a home are shut out of home ownership because of today’s tight lending market. In making the announcement of this change, the White House said it estimates these new, lower premiums will allow as many as 250,000 new buyers to buy a home.
The department of unanticipated consequences
This could actually fall under the department of unanticipated consequences. As a result of the financial meltdown and the foreclosure crisis that followed it, the FHA increased its mortgage insurance premiums to shore up its finances. The unanticipated consequence of this is that it froze many potential buyers out of the market. However, the jobs picture is getting better, foreclosures have fallen to their lowest levels since the year 2006 and home values are on the rise. As a result, the FHA announced last March that it would not need another bailout given these improving financial conditions. The White House said that even after premiums are lowered, the reserves in its fund are projected to increase by $7 billion to $10 billion annually.
The people that need FHA loans
Why are FHA loans important? There are many people that can qualify for conventional mortgages or mortgages backed by what’s called magic (MGIC) money. However, low-income people and those that are high-risk borrowers due to the recent financial crisis find that FHA loans are an important lifeline. This is also due to the fact that private lenders have tightened their lending standards. So for many borrowers FHA-backed loans with their small down-payment requirements and easier credit score hurdles are the only ones available.
More good news
If you are a first-time or low-income homebuyer there’s even more good news. Fannie Mae and Freddie Mac recently announced that they want to open up lending to more of these people. As a result they will begin backing mortgages requiring a down payment of as little as 3% of the home’s price. This represents a reduction of 2% from the 5% down that Freddy and Fannie are already requiring. Going back to the example of a $100,000 home, this means a qualified borrower would be required to put down only $3000 instead of $5000.
Strict criteria
However, to qualify for one of these 3% down loans you will have to meet some strict requirements. You will need to have a credit score of at least 620 and be able to provide complete documentation of your assets, income and job status. The agencies will also require you to take homeownership counseling – as another way to reduce their risk.
Fixed rate loans
These loans will be fixed rate for both programs and will be available to both first-time homebuyers and those that are seeking to refinance. Fannie Mae began offering 3% down loans effective December 13 while Freddie Mac will begin offering them as of March 23.
Who will benefit?
This is aimed at expanding mortgage access to first-time home buyers that are typically younger people that have not yet had the time required to save a big lump sum for a down payment on their mortgages. As you can see, this is not exactly a radical departure from what FHA is doing now but should definitely help some people. Fannie’s and Freddie’s 3% loans should even have some advantages over the 3.5% down loans offered by the FHA. As an example of this, if you were to get an FHA loan you would have to pay for private mortgage insurance premiums for the entire term of your mortgage, which is typically 30 years. This would add an additional 1.35 points to your monthly payment. What this amounts to is that a loan with a 4% rate would become a 5.35% mortgage. That’s about another $80 a month extra for every hundred thousand dollars borrowed or $960 a year.
You could even cancel the mortgage insurance
If you have a Fannie Mae or Freddie Mac loan, you can actually cancel your private mortgage insurance premiums once your mortgage balance drops below 80% of your home’s value. This can be either because you’ve made enough payments or because your home’s value has increased. As an example of this, if home prices increase 5% a year for three or four years, you should be able to cancel your insurance, which would save you tens of thousands of dollars over the life of the loan.
Good news for those that are underwater
There’s also some good news for homeowners that owe more than their homes are worth. You might be able to use the government’s HARP (Home Affordable Refinance Program) program to refinance your mortgage and get your monthly payments lowered considerably. To be eligible for this program you must have a mortgage owned or guaranteed by Freddie Mae or Freddie Mac and it must have been sold to one of these entities on or before May 31, 2009. There are some other eligibility requirements that you would need to meet and you can learn about them by clicking on this link. But if you do qualify it’s likely you could see your monthly mortgage payments reduced by as much as $500. Plus, if there is absolutely no way you can continue homeownership, HARP offers a way to get out from under your mortgage and without having to go through foreclosure. Here, courtesy of National Debt Relief is a short video with more information about this program.
