Will they ever get it right?
David Stevens, Federal Housing Commissioner, has issued a “Special Edition” press release confirming that both upfront and monthly required FHA mortgage insurance will be modified on all FHA case numbers issued on or after September 7, 2010. The changes will have a huge impact on any FHA borrower who needs to keep the monthly payment lower in order to qualify. It is also expected to significantly reduce the number of closed FHA Streamline refinances. That’s because the streamline guidelines already require that the borrower save at least 5% when refinancing. With the monthly mortgage insurance increasing substantially, it will eliminate many borrowers unless their current interest rate is very high. Read below for details.
Effective September 7, 2010, FHA’s upfront mortgage insurance premium will be reduced to 1.00 percent of the loan amount (from the current 2.25%). However, the mortgage insurance borrowers pay each month as part of the mortgage payment will increase.
Example: For a $300,000 base loan, at 2.25%, the upfront insurance would be $6,750. Effective September 7, the upfront insurance on a $300,000 loan will drop to $3,000. Not bad so far.
The big whammy lies in the increase in the monthly mortgage insurance – which is where the borrower may have trouble qualifying based on income and monthly debts.
The monthly mortgage insurance will increase from .50-.55% to .85-.90%. This insurance is calculated as an annual amount but paid monthly in the mortgage payment. That means on a $300,000 loan, the monthly insurance will increase from a max of $137.50 to a max of $225.00. This makes the monthly mortgage payment $87.50 more each month. That is significant.
As mentioned above, it will be an even greater problem for those wanting to refinance using FHA streamline. Take the example of a borrower with a mortgage payment of $2000.00 per month. Since the guidelines require a minimum 5% savings in the payment, dropping the payment to $1900.00 would be sufficient. However, if the mortgage insurance will jump up by $87.50, then the borrower has lost most of that 5% savings needed to qualify.
The FHA streamline has been knocked back by several changes over the past year. As if the prior changes weren’t diffcult enough, this change will surely cripple the streamline program. Surely, HUD realizes the same. And if no exception is made for streamline refinances, then I surmise this was very much intended and HUD’s goal is to further curtail streamline closings.
If you are looking to buy a home, you must be very aware of these changes and how they will affect your costs and monthly payment. Ask me about an alternative financing solution that will keep your payment lower.
Til my next post . . .
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