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FHA PMI Changes Deemed Unfair to Home Buyers

While FHA has offered consumers the chance to buy a home with little money down, it’s most recent changes to the mortgage insurance required on their loans is unsettling for those opting to use the program after June 1, 2013.

Traditionally, FHA required private mortgage insurance on homes purchased with less than a 20% down payment, as do conventional programs. However, once homeowners get to the point of 22% equity in their home, the mortgage insurance was dropped.

FHA is now requiring this mortgage insurance to remain on the mortgage for the life of the loan. Last month, FHA also raised its premium on mortgage insurance. It has been stated that all these changes have been set in motion to help FHA recover from a deep financial hole. However, the biggest boost to FHA’s finances will come from the permanent mortgage insurance requirement. This change will make an additional $10 billion in fees for FHA.

Contrast this lifetime MI requirement on FHA loans to the conventional market, which is required to drop the MI once a loan reaches 20% equity, and the exemption for FHA seems unjust. More importantly, it’s not truly evident why FHA needs the money.

Obama administrators estimated FHA needs of $943 million for 2014, excluding any gains the agency may have received from recent legal settlements. Most of these expected losses, however, are expected from FHA’s reverse mortgage program. The permanent MI reform, however, does not apply to the reverse mortgage program. Therefore, new FHA buyers are paying to bailout a defunct program which does not have the same expensive lifetime MI requirements.

Also, with improvements in the economy and rising home prices, FHA may not need such a large amount to recover its losses. Considering the higher lifetime costs of this loan, however, FHA may be even further pigeon holed into being the “high-risk” lender, thereby shouldering more losses down the road.

Some argue buyers with little down should take the FHA loan now in hopes of refinancing in seven years or so to a conventional program, once they build up the equity needed. With rates as low as they are currently, however, that conventional refinance rate may not be low enough to show much, if any savings upon refinance.

Does this mean FHA programs aren’t the best choice anymore to buy a home with little money down? Most experts agree this is not the case. Even if a borrower refinances later to a conventional mortgage without MI at a higher interest rate which results in a payment about the same as it is with the FHA loan they are replacing, the interest is still a tax deduction. There is the silver lining.

With FHA 30 year fixed rates today at 3.625% and lower, finding an affordable mortgage with low money down is possible. To see which program best suites your needs, contact me at pwoods@mychartermtg.com today.

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