The goal of home ownership for first time home buyers, minorities or buyers suffering some slight credit blight may have just gotten a bit harder. As this segment of buyers look to home ownership with renewed interest, available loan options are starting to become significantly more costly and may put home ownership out of reach for many prospective buyers.
Interest rates may be at the lowest in recent history but some loan type options have the potential to become cost prohibitive because of new restrictions and rules-case in point, the proposed new rules and cost for obtaining an FHA loan. FHA loans provide loan guarantees primarily for buyers who are first time home buyers, have slight credit issues or lower credit scores, lack enough money for conventional down payments or have some other qualification issues required by other types of loans. In 2012, nearly 50 percent of black and Hispanic borrowers took out FHA loans. FHA's low down payments have long lured first time buyers, and 77 percent of FHA buyers in 2012 were purchasing their first home.
According to the National Association of Realtors survey, “Profile of Home Buyers and Sellers 2012,” 39 percent of all buyers nationally were first time buyers and regionally first time home buyers comprised 37 percent of all home buyers. These numbers are up slightly from last year and are indicative of the growing number of people returning to the idea of home ownership.
So, what impact will the proposed new FHA rules have on first time home buyers, minorities and other higher risk buyers? Let’s quickly look at the current cost of an FHA loan. Although, the down payment requirement for an FHA loan is only 3.5 percent, the MIP (Mortgage Insurance Premium) fees can be a major hurdle buyers have to contend with. Currently, MIP fees for an FHA loan have an upfront charge of 1.75 percent of the total loan amount and a 1.25 percent monthly MIP (mortgage insurance premium) fee. The 1.75 percent can be rolled into the loan amount but this raises your monthly payment and coupled with the 1.25 percent monthly MIP can add hundreds to your monthly mortgage payment. Thus effectively reducing the amount of home you can afford and the number of buyers that can afford the loan.
As an example, on a $200,000 loan, the 1.75 percent upfront fee is $3,500. The current monthly MIP (Mortgage Insurance Premium) is 1.25 percent of the total loan amount or $208/mo. The upfront charge of 1.75 percent will stay the same but one new proposed change is to raise the monthly MIP to 1.35 percent thus making the MIP $225/mo on that same $200,000 loan.
In addition, the monthly MIP fee of 1.25 percent currently drops off when a borrower reaches 22 percent equity (and at least 5 years of payments). In a typical 30 year loan, the mortgage insurance lasts for a little over 10 years. After that, it's assumed that the homeowner is unlikely to default, and the insurance is no longer charged. HUD announced, however, that borrowers will soon be charged mortgage insurance for the entire life of their loans, meaning a $200,000 loan no longer costs $225/mn (with gradual decreases as the loan size drops) for 10 years. There will soon be MIP each month as long as they have their loan regardless of the amount you have paid down the principal and will cost thousands more over the life of that loan.
When you consider first time home buyers constitute 37 percent of all buyers in our region and 77 percent of these buyers used FHA loans, the impact will be significant. Also, these numbers do not necessarily include minorities or higher risk buyers since they may not be first time home buyers.
As the housing market continues to rebound, some buyers will have to explore other loan options if they wish to become part of the American dream and Realtors and lenders will have to figure out ways to make this happen. The American dream may be a little harder to obtain, but it's still out there!