The Hurdles to Not Putting 20% Down

If you are a first time home buyer or trying to get into a home without putting down the usual 10 or 20 percent, the Federal Housing Administration is your go-to for a mortgage. As the housing market continues to improve, the FHA has become a big piece of the home financing market. There were $233 billion in the new FHA-backed mortgages issued in 2012; and as a share of the total mortgage market, about 20 percent of all mortgages are FHA-backed. To put that in perspective, only about 3 percent of all mortgages were FHA-backed in 2006. So its not a stretch to sat that the FHA has been playing a key role in the housing recovery we are seeing across the nation.

But earlier this year, the FHA announced some changes to the way they’ll be handling loans. These are changes that are aimed at making these loans less attractive for consumers and safer for the FHA. Here’s a quick rundown of the changes and when they take effect:

April 1: Higher Mortgage Insurance Premium (MIP) rates

MIP was increased by 0.10 percent on most new FHA loans and is now as low as 0.45 percent of the value of the loan and as high as 1.35 percent of the value of the loan.

That means your annual MIP on a $250,000 house could be as high as $3,375 or about $281 per month in the first year! Ouch!

April 1: No credit for bad credit

If a borrower has a credit score below 620 and a debt-to-income ratio of more than 43 percent, the lender will have to “manually” underwrite the loan. This basically means that the lender is going to have to provide much more substantial information about the potential borrower in order to get approved…good luck!

June 3: No more MIP phase-out for the most new FHA loans

The old rules used to allow for borrowers to stop paying MUIP when their loan balance fell below 78 percent of the original loan amount. After June 3, borrowers will be required to pay MIP for the life of the loan if their starting loan-to-value is greater than 90 percent. That’s tens of thousands of dollars in insurance premiums over the life of the loan.

If your loan-to-value starts below 90 percent (basically meaning that you put more than 10 percent down on the house), you must still pay MIP for 11 years before it phases out.

 

The FHA is taking these steps in an attempt to shore up their own balance sheet and try to avoid a major government bailout. So, if one of these steps causes potential hurdles to you, it may make sense to continue saving a few more months.