Ever felt you took two steps forward and then realized you also took one step backward? That is how I feel today about the housing market. In a word - inconvenienced - specifically related to the Federal Housing Administration.
If you are looking to buy or refinance in the near future, keep reading, as acting sooner is definitely better than later.
In January 2013, the U.S. Department of Housing and Urban Development announced revisions to the FHA's policies concerning the cancellation of mortgage insurance premiums. Also, HUD announced an increase on mortgage insurance premiums on FHA loans.
Effective April 1, 2013, borrowers of most new FHA loans will be required to carry mortgage insurance throughout the lifetime of their loan. Borrowers of FHA loans no longer will be able request their mortgage insurance be cancelled after their loan-to-value reaches 78 percent.
Why is FHA making this change? FHA loans are insured, unlike guaranteed loans (e.g., VA loans), and the FHA must rebuild its reserve funds. The law requires the FHA to maintain $2 for every $100 it insures. Currently, the FHA is in the hole $1.44 for every $100 it insures. Being in the negative puts the FHA in the position of having to increase its rates and change its lending policies.
How did FHA get into this situation? Over the years, the FHA has been liberal in its lending practices. The consumer reaped the benefit of those practices, and currently there is a growing trend among borrowers to default on loans after the mortgage insurance no longer is required. Thus, the FHA must take measures like those outlined above in order to remain a viable lending option to consumers.
I compare FHA's policy changes to the 2012 tornadoes that affected the Greater Chattanooga community. Following the tornadoes, homeowner insurance premiums increased to compensate for all the money paid from those claims. Also, some insurance companies changed their policies to cover only actual damages, as opposed to the previous practice of covering full replacement costs.
Does all of this mean FHA loans are bad? Absolutely not. Compared to conventional loans, FHA loans are appealing for a variety of reasons. FHA loans require a much lower down payment and a lower credit score than conventional loans. FHA allows the borrower to have a larger debt-to-income ratio than is required for conventional loans. And, FHA loans are assumable, unlike most conventional loans.
We cannot change the new FHA loan guidelines. However, we are in control of how we act (or fail to act) in response to such changes.
My suggestion to all future homebuyers is to work hard on your credit score and pay down your current mortgage so that you have more than 20 percent ownership in your property. I encourage consumers to contact a mortgage lender to discuss their options. If you do not already have a lender, a Realtor can point you in the right direction.