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Federal Housing Administration (FHA) loans are generally used for home buyers who don’t have the 20% down payment that is usually required to obtain a conventional home loan. Because FHA loans allow for less than 20% down payment (as little as 3.5% down), these loans require mortgage insurance. This insurance protects lenders and the FHA against losses due to foreclosures, short sales, etc. But a very high number of distressed sales causes problems for the FHA. What does this mean for home buyers and those refinancing through FHA loans?
You guessed it! Those insurance rates must be adjusted. Upfront and annual mortgage insurance premiums have been steadily increasing over the past couple years. And while this latest change (effective June 1) doesn’t increase the actual insurance premiums, it does dramatically change the annual insurance premium’s lifespan.
Previously, annual premiums were removed after 5 years, or once the loan amount hit 78% of the home purchase price (whichever was later). Now the annual premiums stay for the life of the loan. This is a huge change! That will cost a borrower over $90,000 on a $270,000 loan**.
With these changes, homebuyers may want to look at other options such as conventional loans with lender-paid mortgage insurance. These loans will often provide a much better financial choice for a homebuyer than FHA.
Is anybody thinking about buying a home on an FHA loan? If so, contact us and we’ll share how you may benefit from a conventional loan with lender-paid mortgage insurance. We’re here to help!
** Calculation: $270,000 loan equals $3,645/year in annual mortgage insurance (based on 1.35% rate for loan amounts < $625,500 and less than 5% down). Assuming the mortgage insurance is on for an additional 25 years beyond its lifespan under old rules (fell off after 5), 25 years times $3,645 per year = $91,125.