Two changes to FHA mortgage insurance

 Regulations, Residential Mortgage  Comments Off on Two changes to FHA mortgage insurance
Jul 202019

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By G. Steven Bray

The House Financial Services Committee recently passed two bills out of committee that could make FHA loans more attractive.

The first, The FHA Loan Affordability Act, would repeal the requirement that FHA borrowers pay mortgage insurance for the life of their loans. Mortgage insurance on conventional loans automatically ends when the loan balance is 78% of the original home value.

Mortgage insurance can considerably increase a homebuyer’s mortgage payment. On a $250k 30-year loan, mortgage insurance adds $180 to the monthly payment.

Despite the pain of never-ending mortgage insurance, this FHA requirement really has been more of an annoyance than an impediment for homebuyers who want to use an FHA loan. Home price appreciation often allows FHA borrowers to refinance into a conventional loan with no mortgage insurance within a few years of purchase, and perpetually low mortgage rates have made that an attractive option.

Interestingly, the wording of the bill appears to disallow appreciation as a means of achieving the requisite home equity to cancel mortgage insurance. Thus, homebuyers with strong credit still may favor conventional loans.

The second bill, The Housing Financial Literacy Act, would provide a 14% discount on the the upfront mortgage insurance for FHA borrowers who complete a homebuyer course prior to closing. On that $250k 30-year loan, the discount would save a homebuyer $625.

Both bills now go to the full House for consideration.

Mortgage insurance companies tighten credit

 Loan Guidelines, Residential Mortgage  Comments Off on Mortgage insurance companies tighten credit
Feb 232018

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By G. Steven Bray

As you’re probably aware, when buying a home, if your down payment is less than 20%, your mortgage payment will include mortgage insurance. This insurance is the lender’s way sharing some of the risk associated with more highly leveraged loans.

We call companies that specialize in this form of insurance mortgage insurance or MI companies – pretty clever, huh – and they often have special guidelines that apply to loans that require their product.

Recently, the MI companies expressed concern about Fannie Mae and Freddie Mac increasing the amount of debt they’re willing to accept for a borrower receiving a conventional loan. Both now accept loans for which the borrower’s debts equal up to 50% of the borrower’s gross income.

Four of the MI companies announced that starting next month, they will require a 700 credit score anytime the borrower’s debt exceeds 45% of gross income. One company further is requiring a min 5% down payment in such cases. (Recall that it’s possible to get a conventional loan with as little as 3% down.)

I don’t expect this will affect a huge number of borrowers as most folks having lower credit scores and making small down payments find it more advantageous to use the FHA program. However, it does represent the first tightening of credit standards I’ve seen in a while.

Why canceling the FHA rate reduction was the right move

 Loan Programs, Residential Mortgage  Comments Off on Why canceling the FHA rate reduction was the right move
Feb 042017

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By G. Steven Bray

I’m sure you know by now that the Trump administration cancelled the FHA mortgage insurance rate reduction put forward in the waning days of Obama’s term. This caused moans from most of my housing industry friends, but I think it was the right move.

First, keep in mind that FHA MI provides insurance against defaulted FHA loans. By law, the insurance fund must be at least 2% of the FHA’s loan exposure. The fund last year exceeded the 2% threshold for the first time in many years. Given that economists are predicting a housing slowdown this year, wouldn’t it make more sense to let the fund grow a little before chopping the premium?

Second, I don’t believe the premium reduction would have resulted in many additional homebuyers. Instead, I think it simply would have transferred business from private mortgage insurance companies to FHA. I’ve never seen an honest analysis from HUD to justify its MI rates based on its risk exposure. Moreover, FHA also has up-front MI and never cancels its MI, unlike conventional loan mortgage insurance. If FHA wasn’t just trying to increase its market share, maybe it could have tweaked those characteristics.

In conclusion, I’m not convinced the move by the outgoing administration wasn’t intended to make the incoming team look bad. Personally, I think it makes them look prudent.

More leverage for investment properties

 Investment, Loan Guidelines  Comments Off on More leverage for investment properties
Oct 312016

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By G. Steven Bray

Since the financial collapse almost a decade ago, rental property buyers have been stuck with a minimum 20% down payment for conventional financing. Not only had Fannie Mae and Freddie Mac not forgotten about all the high-leverage loans they purchased that went bust, but the mortgage insurance companies also got burned. And for conventional financing, you need mortgage insurance to go higher than 80% leverage.

That has changed. Mortgage insurance companies have an appetite for rentals again. At this time for buyers with 680 or better credit, we’re able to accept a 15% down payment.

Of course, you’ll pay a premium for the mortgage insurance. Your MI rate would be roughly 50% higher than what one would pay when buying a primary residence. On a $200k loan, that equates to a monthly MI payment of about $102 assuming good credit. However, it only takes about 5 years to pay the loan down to 78% of the purchase price, at which point the mortgage insurance gets cancelled.

USDA making housing loan a bit more expensive

 Loan Guidelines, Loan Programs, Residential Mortgage  Comments Off on USDA making housing loan a bit more expensive
Aug 052015

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By G. Steven Bray

USDA is raising its guarantee fee for the Rural Development home loan program on Oct 1st. The Rural Development program is one of the few no-money-down loan programs. It’s only available in areas USDA considers rural in nature, but that definition includes a lot of exurbs of major TX cities.

The guarantee fee is up-front mortgage insurance due at loan closing. Most borrowers choose to roll the fee into the loan amount rather than pay it at closing.

The fee is rising from 2% to 2.75% of the initial loan amount. On a $150k home, that will raise the monthly payment by about $5.50 at today’s interest rate.

USDA is not changing its monthly mortgage insurance rate, called the annual fee, which remains 0.5% of the loan balance.

Please note that USDA will apply the change based on the date it commits to the loan, not the date the borrower applies. In order to beat the change, you really need to find a home this month as it generally takes about 30 days from contract signing to USDA loan approval.