FHA Premium Rate Cut a Big Break for Home Buyers

By Ryan Dosen

 

President Obama unveiled a plan earlier this week designed to help cash-strapped home buyers hop into the housing market. The Federal Housing Administration (“FHA”), a mortgage insurer and government agency within the U.S. Department of Housing and Urban Development (“HUD”), will be cutting insurance premiums in the near future, opening the doors for more people to buy homes as we approach the spring home buying season.

 

The FHA

The FHA is the largest insurer of mortgages in the world. According to its website, the “FHA insures mortgages on single family and multifamily homes including manufactured homes and hospitals…. FHA mortgage insurance provides lenders with protection against losses as the result of homeowners defaulting on their mortgage loans.” The FHA says that it “is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing. The proceeds from the mortgage insurance paid by the homeowners are captured in an account that is used to operate the program entirely.”

In truth, the FHA costs the taxpayers nothing—unless it needs to be bailed out by taxpayers—which happened in 2013, to the tune of $1.7 billion. The 2013 bailout was the first in the agency’s 80 years of existence.

FHA loan programs are designed to help individuals that may not meet conventional loan lending standards. FHA home loans are available with down payments as small as 3.5 percent. FHA loan programs also are generally available to people with lower credit scores. The FHA’s website says that applicants are now required to have a minimum FICO score of 580 to qualify for the attractive programs. In reality, you will likely need scores higher than 580 to qualify. MarketWatch reports that the average credit score for an FHA buyer is 690; Fannie- or Freddie-backed buyers average around 760. Karen Jackson of Waterstone Mortgage in West Chester says that in order to qualify for an FHA loan, your credit score may need to be 620 or higher.

 

FHA Mortgage Insurance Premium Cuts

With changes expected to take effect later this month, the FHA will be reducing its annual mortgage insurance premiums by 50 basis points or 0.5 percent, from 1.35 percent to 0.85 percent of the mortgage amount. The up-front 1.75 percent premium charged by the FHA is expected to remain unchanged. (Note: this up-front premium can be added on to the end of the mortgage rather than paid at closing.)

National Association of Realtors (“NAR”) President Chris Polychron said that the NAR is “optimistic that more affordable FHA loans will have a positive impact on first-time buyers who have been entering the market at a lower-than-normal rate.” HUD Secretary Julian Castro says that the lowered premiums “will make home ownership more affordable for over two million Americans in the next three years.”

President Obama spoke in Phoenix this week and indicated that the premium reduction will save FHA borrowers approximately $900 per year on a $200,000 mortgage and that the program could even help many refinancers take advantage of today’s low rates. “Over the next three years,” Obama argued, “these lower premiums will give hundreds of thousands of more families a chance to own their own home. And it will help make owning a home more affordable for millions more households overall in the coming years.”

Republicans see the move as premature and/or irresponsible. House Financial Services Committee Chairman Jeb Hensarling stated that if “President Obama follows through on [the FHA premium reduction] pledge, he will be increasing the likelihood that taxpayers will have to foot the bill for yet another bailout.”

 

Local Impact

Regardless of the long-term impact of the lowering of FHA premiums, the immediate impact should be positive for the real estate market. Our government continues its crusade to create favorable conditions for people to buy and sell homes.

FHA loans are limited in Chester County and Delaware County, PA to $379,500. If you are in the market for a sub-$400,000 home and you have had trouble qualifying in the past, this latest development at the FHA could be your difference-maker.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Contact Ryan Dosen for buyer or seller representation or for more perspective on the local and national real estate market by emailing rdosen@megillhomes.com or calling 610-399-0338. Please also visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.