Consumers need to be aware that the Federal Housing Administration (FHA) is raising its mortgage insurance premiums (MIP) and changing MIP cancellation policies. These new requirements are needed to mitigate financial losses incurred by the mortgage insurance fund during the economic and housing downturn.
FHA was able to sustain housing markets nationwide during the economic and housing downturn, but now faces financial problems stemming from losses on reverse mortgages and forward loans sustained during the housing crisis and low home values, causing a shortfall in its reserves. There is talk that FHA may need a government bailout of $943 million in tax payer funds.
Traditionally FHA loans make up between 10 and 15 percent of the market. Last year, because of the downturn and absence of a robust private lending market, FHA stepped up and insured nearly 1.2 million single-family forward mortgage loans, or over 25 percent of all homes purchased in that year.
The National Association of REALTORS® (NAR) has a long history of supporting the FHA's single - and multifamily mortgage insurance program and REALTORS® say the move was necessary to keep the economy afloat. "Had FHA not stepped in to fill the market void when private lenders couldn't, many families would have been unable to purchase homes and housing values could have dropped even more, causing an even deeper recession," explains Carolyn Miller, president of the Silicon Valley Association of REALTORS®
FHA has taken a number of steps to shore up funds. Effective April 1, 2013, FHA's annual MIP for all new loans that are less than or equal to $625,500 and with a loan-to-value (LTV) ratio greater than 95 percent is now 1.35 percent of the loan amount. The LTV ratio is calculated as the percentage of the value of the house that is paid for by the loan. Loans above $625,500 and with LTV's greater than 95 percent are now 1.55 percent of the loan amount. In April 2012 the upfront mortgage premium was raised to 1.75 percent.
FHA will also require most borrowers to continue paying annual premiums for the life of their mortgage loan. Effective June 3, 2013 FHA will require borrowers who take out a new FHA loan with an LTV ratio of greater than 90 percent to pay the MIP until the end of the mortgage loan term or for the first 30 years, whichever comes first. Previously, once the loan was paid down to 78 percent of the original value of the house or after five years, whichever came later, the borrower would no longer be required to pay the MIP.
"In Silicon Valley, where home prices are some of the highest in the nation, many buyers are borrowing at the top of the FHA limits. The MIP can amount to hundreds of dollars each month, in addition to their regular mortgage payment," says Miller.
Additionally, FHA is requiring lenders to manually underwrite loans for borrowers who have a credit score below 620 and a total debt-to-income ratio greater than 43 percent. Also announced, but not yet approved is a proposal by FHA to increase the minimum down payment requirement for mortgages with original principal balances above $625,500 from 3.5 to 5 percent.
A higher down payment requirement could impact millions of first-time home buyers, says Miller. Last year, more than four out of every 10 first-time buyers purchased their homes with an FHA-insured mortgage.
"Many first-time home buyers and borrowers with modest incomes rely on FHA-insured loans because they can require a down payment as low as 3.5 percent," says Miller.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
For further information, please email or call the SILVAR office at (408) 200-0100.