Over the last months conventional mortgage guidelines have tightened, and with risk based pricing mortgage financing has gotten more expensive for most borrowers. Conventional mortgage insurance has pulled back on what they will cover, and the cost of mortgage insurance has gone up (more increases are coming in August). This combination has made it harder to qualify for a conventional loan, and more expensive for those who have lower down payments and good but not great credit scores. The one bright spot in the real estate financing market has been FHA. Earlier this year FHA raised their maximum loan limit (up to $410,000 for a single family home here in the Chicago area, lower in other parts of Illinois) making FHA a great option for many borrowers who would have once been conventional borrowers. But FHA is feeling the pinch of the market, too. Effective July 14th FHA is changing to risk based mortgage insurance.
FHA is a government backed loan which is designed to help more people buy homes. FHA doesn’t loan the money themselves, they set up the guidelines and insure the lenders against loss through their mortgage insurance premiums. The goal of FHA isn’t to make a profit, like the private mortgage insurance companies, but to encourage more home ownership which makes a more stable society. This means they are willing to take on borrowers who are considered higher risk due to low down payments, lower credit scores, and those who haven’t built up traditional credit. This is still their mission, but now the riskier borrowers will end up paying a little more to make sure the program stays solvent.
FHA breaks their mortgage insurance premium down into 2 parts: an up-front portion that is added to the loan amount and financed over the life of the loan, and a monthly insurance premium which is part of your normal payment. This used to be a one size fits all solution, as long as you qualified for FHA financing you paid the same premium. They are now basing the premium on borrower’s down payment and credit scores. This means the borrower’s with the lowest risk will get the best pricing, and those who are higher risk will have to pay a little more. The current cost of FHA is a 1.5% up-front mortgage insurance premium and .50% yearly premium which is paid monthly. The new schedule will lower the up-front premium for most borrowers who invest at least 5% for their down payment. The monthly premium is going up for all minimum down payment buyers (3% cash investment) and the up-front portion changes based on their credit score.
FHA is still the best choice for many borrowers and the only choice for home buyers with little or no money for a down payment and closing costs. Here is some more information on some of the advantages of FHA financing.
This is what the premiums will be after July 14th.