As FHA Program Changes, Smart Low Down Payment Alternatives Expand
By Jay Carden
The path to homeownership goes far beyond finding the right home. It must also lead to the right mortgage. That’s an important consideration for REALTORS® as the Spring buying season moves ahead. Although the tax credits for first-time and existing home buyers will expire at the end of April, low home prices and interest rates continue to create attractive buying opportunities.
REALTORS®, however, need to be aware of changes announced early in April by both the FHA and Genworth Mortgage Insurance that will have an effect on eligibility, pricing and down payment options for first-time and low-to-moderate income borrowers. It’s now more important than ever for homebuyers to understand their mortgage financing options.
Buyers putting less that 20 percent down have two basic options when choosing a loan: loans insured by the FHA and loans insured by private mortgage insurance (PMI). Both programs serve the market well, and are safer than the once popular combo or “piggyback” loans no long in favor. While many are quick to assume an FHA mortgage is less expensive than one with PMI, the truth is that monthly costs are actually quite competitive, and there can be real advantages to choosing a PMI loan over FHA. REALTORS® need to help their clients understand what type of loan best meets their needs.
Pricing
While FHA pricing often has been more favorable when compared to PMI, in April the Agency raised its “upfront mortgage insurance premium” from 1.75% to 2.25% of the base mortgage amount. That increased the cost of every FHA loan. The price hike tacks $1,000 on to a $200,000 mortgage, for example, costs that can never be recovered when financed into the full mortgage amount.
The FHA also has a request pending to increase its maximum monthly mortgage insurance premium, perhaps pairing the change with a decrease in the upfront premium. An increase from 0.55% to 0.90% would raise the monthly premium from $92 to $150 on a $200,000 mortgage. The possibility of such an overall price increase should not be ignored.
Private mortgage insurers generally raised prices in 2008, but multiple premium structures make their pricing very competitive with the FHA. In general, PMI pricing is more affordable than FHA for borrowers putting 10-15% down. While the monthly PMI payment may be higher than FHA on loans with 5% down, buyers taking advantage of Single Premium MI, where the entire mortgage insurance premium is paid at the outset, enjoy lower monthly pricing compared to FHA at 95, 90 and 85 LTVs. For example, the FHA monthly payment (PITI) for a 95 LTV loan on a $200,000 house at 5.5% would be $1, 599, while a single premium MI payment would be $1,528.
Down Payment
The minimum down payment required by FHA is 3.5%, and buyers must now have a FICO rating of 580 or above to qualify. Those with scores below 580 must make a down payment of at least 10%. Additionally, FHA charges a higher monthly premium for those putting less than 5% down (currently the full 0.55% versus 0.50%).
Private mortgage insurance is now available in every market across the nation for loans with as little as 5% down. Genworth Mortgage Insurance recently issued new underwriting guidelines designed to expand low down payment lending, making it possible for more low down payment homebuyers to put 5% down, regardless of the state or market in which they live. Insured mortgages with as little as 3% down may be available for loans that meet Affordable Housing Guidelines (usually determined by income limits).
In developing its new guidelines Genworth established both Retail and Non-Retail parameters. Both allow for private mortgage insurance on loans with as little as 5% down in all markets, but there are some differences depending on location. Realtors should check details for their location.
Tax Deductible
Monthly paid premiums for each are tax deductible, and the insurance may be cancelable when equity in the home reaches 20 percent.
Other Benefits
Mortgage insurers provide many robust benefits at no extra cost. Genworth Financial Mortgage Insurance, for example, offers:
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Job loss protection that covers a borrower’s mortgage payment (principal, interest, taxes and insurance) in the event of involuntary unemployment. The Genworth-provided coverage is for up to $2,000 a month for up to six months during the borrower’s benefit period, with a maximum of three monthly payments per job loss occurrence.
o Homeowner Assistance programs to keep families in their homes during times of financial hardship through a wide range of workout options. Genworth alone completed nearly 20,000 mortgage “workouts” in 2009, saving some $2.6 billion of mortgages from foreclosure.
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Homebuyer Education programs to ensure buyers make smart purchasing decisions. Research shows that loans that include homebuyer education are less likely to default. The Genworth Counseling Saver program offers a discount on the mortgage insurance rate, as well as up to $3,000 of vendor discounts to borrowers that receive eight hours of pre-purchase face to face or classroom homebuyer education.
Homebuyer Education programs to ensure buyers make smart purchasing decisions. Research shows that loans that include homebuyer education are less likely to default. The Genworth Counseling Saver program offers a discount on the mortgage insurance rate, as well as up to $3,000 of vendor discounts to borrowers that receive eight hours of pre-purchase face to face or classroom homebuyer education.
As a real estate professional you enable borrowers to buy homes with greater confidence. The significant changes being made by private mortgage insurers to their products and programs are helping restore buyer confidence in the market and belief in a sustainable mortgage. To learn more, visit www.smartermi.com.
Jay Carden RE/MAX Properties, Inc. Search the Colorado Springs MLS
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