How FHA Loan Changes could cost Foreclosure Buyers Thousands

by on Mortgage

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FHA has been a great tool for first home buyers and investors alike. They offer low down payments starting at 3.5%. They made loans available to buyers with less than perfect credit ratings and even offered loan packages that allowed a home owner to wrap renovation costs into the loan.

Good things never last and such has been the case recently with FHA. They are instituting several policy changes that will dramatically affect upfront and long-term loan costs. This change is a way to offset FHA’s more risky loans, increase their earnings and help drive other buyers into more conventional loans.

So, before you run off and get the low down payment FHA loan, you need to be familiar with how their policy changes will affect your loan. These changes will take effect in April, 2013.

Minimum Credit Score

New FHA borrows will need to have a credit score of at least 580 to qualify for the low down payment loan. If your FICO score is less than 580, you are not disqualified for a loan, but you will be required to put a minimum of 10% down.

How it Affects You

If your credit is less than 580, you will either need to fix your credit before getting a FHA loan or you will need to bring more money to the table.

Mortgage Insurance

When you have less than 20% equity in your home, lenders require you to pay mortgage insurance in addition to your monthly payment. Once the equity has increased to 20%, either through renovation, paying down the mortgage or value appreciation, the insurance premium is removed. Mortgage insurance charges vary depending on the size of the down payment and the loan, but they typically annually amount to 0.5% to 1% of the original loan amount.

FHA’s Mortgage Insurance, however, has been increased by 10 basis points. The borrower will pay an upfront fee of 1.75% and a monthly fee of 1.30 % if your loan to value is less than 95% and 1.35% if you put less than 5% down.

How it Affects You

If you borrow $100,000, you will need to pay $1,750 at closing (which can be wrapped into the loan) and an additional $112.50 per month (at the 1.35% rate), plus your mortgage payment. A conventional loan with PMI at 1% will cost you $83.33 per month.

What is more, FHA not discontinue the mortgage insurance once you reach their originally required 78% loan to value ratio. This means that you will continue to pay mortgage insurance for the life of the loan – regardless of the amount of equity you have in the property. This change alone will cost long-term homeowners thousands of dollars in unnecessary fees.

How it Affects You

If you are paying $112.50 per month in mortgage insurance and you pay the mortgage for the full 30 years, you will have paid $40,500 for insurance that benefits the lender.

Manual Underwriting

If the computerized underwriting system flags the loan, FHA will now require a much more intensive manual underwriting. It gives more freedom to loan underwriters to decline the loan.

How it Affects You

If your loan is flagged for manual underwriting, you may be required to have cash reserves of at least one month’s mortgage payment. If your credit score is below 620, your dept to income ratio cannot exceed 43%.

Should You Still Apply for a FHA Loan?

If you can qualify for conventional financing – even if you do not have 20% to put down – it will cost you less in the long run. The cost of carrying the mortgage insurance for the life of the loan or until you sell the property will add thousands of dollars of unnecessary costs.

If you decide to get a FHA loan, make sure you know exactly what the loan will cost you in the end and make sure that you are willing and able to meet their requirements.