Federal Housing Administration loans (FHA loans) are mortgages that contain private-mortgage insurance (PMI) and were created to help minorities and first-time buyers purchase homes. They are also used a lot of times to help potential buyers qualify for a mortgage when they do not have the full 5-20% down payment required for GSE conforming loans. Let's take a look at Southern-Coastal California and other areas where high-income individuals remain dominate.
In wealthy markets here in CA and other states, the conforming limit on GSE loans is generally $625K, yet the FHA loan limit in the same area is $729,750. A borrower can obtain an FHA mortgage with a 3.5% down payment and a mortgage insurance premium (MIP) of 1.25%. On the other hand, GSE conforming loans require a minimum of a five percent down payment and private mortgage insurance of approximately 0.62%. Regardless of the higher MIP, FHA loans have been a very popular option amongst buyers because of the lower down payment costs and minimal requirements.
The loan limits on FHA and GSE loans can greatly influence the borrower's costs and fees when purchasing a home. Financing more than the GSE loan limit ($625,000) will require FHA mortgage insurance at 1.25%, which in CA can be more than the property taxes the borrower will face. Borrowing an excess of $729,750 will generally always require a twenty percent down payment and will come with higher interest rates. Unfortunately, many times a twenty percent down payment is nearly impossible for any first-time homebuyer.
Potential Buyer Alert: The Federal Housing Administration has announced that they are going to increase premiums and take other actions to decrease exposure to risky loans. These actions may include:
- A premium increase of ten basis points, or 0.1%, on the majority of mortgage products.
- Loans with a balance that exceeds $625,000, or jumbo loan, will require a 5% down payment, up from its original 3.5%. The premiums on jumbo loans will also increase another 5 basis points, or 0.05%.
The noticeable issue here for future first-time buyers is the significant increase in down payment. The 1.5% increase on down payments for mortgages that range from $625,000 to $729,750 may be a huge problem and cause delays. Although it is typically the more wealthy individuals looking to obtain a mortgage in this price range, how long will it take to save an extra $10-20K or more for a down payment? Keep in mind that many people have high student loan costs, car loans, child care, credit cards, and other major expenses they face month-to-month.
Along with the new increases, the FHA said that borrowers may be required to pay PMI throughout the entire life of the loan. The guideline that has been in place since 2001 allows FHA-borrowers to wipe out these extra costs once their debt fell below 78% of the loan's balance. However, they state this may not apply to those who provide a 10 percent or more down payment on the home.
This is where an FHA-backed mortgage does not seem as beneficial as it once has. With mortgage rates at historical-lows now, they can only increase from here. While an FHA borrower can choose to refinance to eliminate the PMI, this may not be beneficial if the refinance comes with a much higher interest rate.
These new changes to help protect the institution's exposure to risky loans is a major step in the mortgage lending industry. Unfortunately, the agency did not announce when these new actions are expected to take effect.