You gotta hustle to beat the FHA changes to MIP

The Federal Housing Authority (FHA) which backs most home loans made in the U.S. has announced changes that will cost everyone who takes out an FHA loan on or after April 1. Somehow April Fool’s Day seems appropriate, except that the joke’s on us all.

FHA is required, under the law that created it, to maintain a capital base of 2% of its total loan obligations. Currently, due to eating losses on the large number of defaults on the bad loans that it backed during the real estate bubble, FHA is running at about 1.44% capitalization. The bottom line is that is need more money to continue to operate. One way that it gets money is from collecting a Mortgage Insurance Premium (MIP). FHA’s is the equivalent of PMI – Private Mortgage Insurance, a term that you may be more familiar with from your past real estate dealings. So they’ve decided to increase rates and apply those increases more broadly that they do right now.

The FHA announced changes will have long-term effect on the housing market. They aren’t huge amounts, but these days every bit counts and every small increase hurts people who are already struggling to get into their own home.

First, they are increasing the MIP rates as of April 1^st. The increases are anywhere from 5 to 10 basis points, depending upon the loan amount and the Loan to Value (LTV) ratio calculated for the loan. A basis point is 1 / 100^th of 1 percent. So the increases equate to increases of .00005 to .00010 of added cost per month. The base MIP that these increases are being added to range from 120 to 150 basis points. So, now, on a $100,000 loan you’ll go from paying between $120 to $150 a month to paying $130 to $155 a month.  

Second, as of June 3^rd, they are revoking an exemption that existed for years on loans of 15 years or less. Those loans will now have MIP premiums collected.

Third, as of June 3^rd they are also revising the long-standing policy of removing the MIP requirement when FHA loans had a LTV equal to or less than 78% at the time of origination.

Fourth, they have revised the periods for which MIPs may be collected, with these changes to take effect June 3^rd, also. For loans with LTV of less than 90% the MIP will be collected until the end of the loan or for the first 11 years, whichever comes first. And for loans where the LTV is higher than 90% the MIP will be collected until the end of the loan or the first 30 years, whichever comes first. That may be the biggest change in this whole thing, since many buyers could look forward to getting out from under the MIP once they made enough payments. Not so under these new rules.

The bottom line of all of this is that it’s going to cost more for an FHA loan after April 1^st and after June 3^rd you’ll be stuck with that increase pretty much forever (or until you sell or pay it off). So, if you’ve been kind of putzing around looking for a house, now’s the time to get it in gear and get your offer in. These rules won’t affect you if you get an FHA case number assigned before the deadline dates and the only way to make that happen is to have a mortgage application in place by then.

FHA Rewards the Good Short-seller…

Our local mortgage person email us yesterday with the news that the FHA has issue some new guidance that will allow what could be called the “good short-seller” to get FHA financing again immediately. So, what defines a “good short-seller?” Apparently if the short-seller was not late with payments and the bank that held the old mortgage will certify in writing that they do not owe anything on the old mortgage, i.e. no default judgment luring in the background; then a person who just closed on the short sale of their old home can get a new FHA loan to buy a new home.

This program makes a lot of sense. Many people, through no fault of their own have been put into the position where a short sale is the only way to avoid a foreclosure. Sometimes it’s caused by one of a two-income family getting laid off. Sometimes there are health issues or other things that come up that are out of the control of the borrower. Maybe they were able to keep up with things by stripping savings for a while or by exhausting unemployment benefits. For whatever reason they finally got to the end of their ability to keep up with the old mortgage and a short sale was the only solution.

The fact that these homeowners were able to get their bank to agree to the short sale without being in default is already a minor miracle. Now the FHA adds to their good fortune by making it possible to get a mortgage on a smaller, more affordable home that they will be better able to keep up with. That’s just good policy. These people have proven that they are responsible and trustworthy already and having a way to reward their good efforts to keep up with their obligations and to retain them as homeowners is a good thing.

We have to report so much bad news and so many failed programs to help distressed homeowners that it’s nice to have some good news to report. This program doesn’t cost the taxpayers anything and it helps keep good, honest people in a time when there are very few providing any real help. While I suspect that few will qualify right now, just having this option out there may help change behavior in some who might otherwise have let things go into default before doing the right thing. Let’s hope the banks cooperate.