FHA Is A Powerful Home Buying Tool
First-time home buyers love FHA loans.
In fact, nearly forty percent of buyers age 36 and younger use an FHA loan to buy a home, according to loan software company Ellie Mae.
FHA credit and underwriting requirements are less stringent as compared to conventional mortgage loans.
Homeowners can typically qualify for an FHA loan with a downpayment as low as just 3.5%, and a credit score of just 580 or higher.
But FHA loans aren’t “perfect.” Most come with a mortgage insurance premium (MIP) that cannot be canceled as long as you keep the loan.
That doesn’t mean canceling FHA mortgage insurance is impossible. Quite the opposite. You can refinance out of FHA mortgage insurance, and you might be able to do it now.
Click to see today’s rates (Jul 15th, 2016)
FHA Flexibility Comes With A Cost
Homeowners are drawn to FHA loans for a variety of reasons:
- Low downpayment
- Flexible credit requirements
- Higher debt-to-income allowances
- Low interest rates
- Streamlined FHA refinancing
- High seller contribution maximums
The most common drawback that buyers associate with FHA loans, however, is the mortgage insurance requirement.
A byproduct of FHA loan’s flexible standards is that FHA-insured mortgage loans require not one, but two different types mortgage insurance: upfront and annual mortgage insurance.
Upfront Mortgage Insurance Premium (UFMIP)
Suitably named, this type of mortgage insurance is a one-time premium charged upfront, equalling 1.75% of the loan amount.
FHA allows homeowners to roll this fee into the loan, and the majority of homeowners choose to do so.
This type of mortgage insurance can’t be refunded if you refinance, unless it’s into another FHA loan. But then you would have FHA MIP again. It’s better to refinance into a conventional loan if you can, despite losing this lump sum cost.
Annual Mortgage Insurance Premium (MIP)
Although the name implies an insurance premium that is charged once a year, FHA annual insurance is actually charged monthly. It is included as part of the borrower’s mortgage payment.
The annual fees vary according to downpayment and loan term but the most common annual MIP fee is 0.85% of the loan amount.
Homeowners using an FHA loan to purchase a home in 2016 who put 3.5% down will have to pay the annual mortgage insurance for the life of the loan, or up to 30 years.
Borrowers who put down 10% or more will reduce the timeframe required for annual insurance to just 11 years.
Click to see today’s rates (Jul 15th, 2016)
Home Values Skyrocket. Cancel Your FHA MIP
Paying FHA mortgage insurance doesn’t have to be permanent. You just have enough equity to refinance into a conventional loan.
According the National Association of REALTORS®, the median home listed for sale in the U.S. in May 2016 was $250,000, a full 9% higher than one year ago.
Some experts are predicting that certain areas could see appreciation upwards of 15% in 2016.
That means more homeowners will be in a position to refinance out of FHA, and very soon.
Once a homeowner hits 20% equity based on current value, they can refinance into a conventional loan — one that does not require any mortgage insurance whatsoever.
The process to do so is straightforward. Get an estimate of value from a local real estate agent or loan officer. Online home valuation websites can be inaccurate, so be careful with those.
See if you have around 20% equity based on your home’s estimated value. Be sure to add closing costs onto your existing loan balance if you do not wish to pay them out of pocket.
For example, you purchased a home three years ago.
- Original purchase price: $200,000
- Original FHA loan amount: $196,375
- Payment with FHA MIP: $1,186
After three years, you’ve paid off principal, and your home’s value has risen. Both these factors help you cancel your FHA MIP.
- New conventional loan amount: $188,000
- Current Value: $235,000
- Loan-to-value: 80%
- New payment (no PMI): $898
Refinancing out of FHA MIP can yield substantial savings. Homeowners who received an FHA loan prior to January 2015 are paying quite high FHA mortgage insurance premiums. This is because FHA dropped premiums by 35% in 2015, but only for new FHA applicants.
Pre-2015 FHA home buyers can get a double savings effect: they are tapping into today’s low rates and canceling high FHA mortgage insurance, with one refinance.
What Are Today’s Rates?
If you’re paying FHA mortgage insurance you could be paying too much. FHA homeowners should consider checking their current home value and refinance eligibility.
Doing so could end their FHA MIP obligation in as little as 30 days.
Get today’s FHA mortgage rates now. Your social security number isn’t required and all rate quotes come with access to your mortgage credit scores.
Click to see today’s rates (Jul 15th, 2016)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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