Loans insured by the Federal Housing Administration (FHA) have previously been used by fifty-five percent of first-time homebuyers. With that said, the FHA has made changes in their mortgage insurance premiums (MIPs) that are forcing many of these first-time buyers to rely on more conventional sources of financing.
What changes have occurred?
The two biggest changes being made by the FHA involve their policies pertaining to MIP payment, which has seen gradual increases over the last 2 years. The previous base rate for annual MIP was 55 basis points or 0.55% of the loan amount. Unfortunately for upcoming homebuyers, these changes have caused the rates to skyrocket and are now high as 135 basis points or 1.35% of the total loan amount. This steep increase will likely make applying for an FHA backed loan less desirable for first-time homebuyers, who are already searching for ways to save money after making one of the biggest financial investments of their lives.
Here’s an example to put this information in context for your clients: if a homeowner receives a $400,000 loan, these changes will increase their MIP payment by $267 per month.
If your clients have been contemplating if they should drop this expensive insurance, it won’t be happening for a while. The FHA previously allowed homeowners to get rid of the insurance after five years if they met certain criteria, but they have now done away with this exception. In fact, the FHA’s new policy requires that borrowers keep the MIP for the entire life of the loan. The FHA has also made changes to its loan limits for 2014, as they lowered the maximum financing limit in some high-priced counties from $729,750 to $625,500 to match conforming loans.
Conventional financing options for clients and prospects
The good news is that MIP rates for conventional loans have been dropping and there are an increasing number of lenders offering loans with low down payments. In fact, your clients may be able to qualify for a down payment of only 5% when borrowing up to $417,000, if they have an above average credit score.
Other financing alternatives like 80/10/10 loans can help them qualify for a much larger loan amount with only a 10% down payment. With the way things are looking for FHA insured loans, recommending these options to your clients can help them obtain more reasonable financing for their home.
Looking for a faster way to get your listings off the market?
Despite these recent changes, FHA loans could still be a good option for homebuyers because they offer some benefits over conventional loans, including:
- Credit score as low as 580. However, most lenders require a minimum of 620.
- The entire down payment can be received as a gift.
- Down payment as low as 3.5%.
- Interest rates typically 0.25% to 0.50% better than conventional 30-year fixed rates.
- Non-occupying co-borrowers are allowed. This means that parents can buy a home for their children, even if the latter has no income. The reverse could be true for children to buy a house for their parents.
What does all of this mean for your clients?
As you already know, there’s no financing option that will fit the situation of every homebuyer. You’re their local real estate expert, so demonstrate your expertise by helping them decide which type of loan option is best for them. Once you’ve come to a decision, recommend that they visit a loan officer to make sure it’s the right the one!
Looking for even more mortgage related articles like this? Then check out Homes.com’s featured author, Shashank Shekhar. Also, download and share Homes.com’s editable “First-Time Homebuyer Mortgage Checklist” with your clients and prospects to help them prepare for every step of the mortgage process.
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