Why FHA Buyers Should Buy Now

FHA loans are on the cusp of some significant changes that will impact 2013’s FHA buyers.  If you are a FHA home buyer or if you are a Realtor working with FHA home buyers, this is information you need.

First – Some Background

Most of us know little about FHA, so let’s start with some basic history.  The FHA was formed by congressional decree in 1934 to help improve the housing market.  Back then, buying a home was tough.  Mortgage approvals typically required a down payment of 50 percent and loans would normally balloon within 5 years, requiring the buyer to pay them in full or try to refinance.

The creation of the Federal Housing Administration changed all that.  FHA set minimum loan approval standards and, if a bank would make a loan subject to those standards, FHA provided mortgage default insurance on that loan.  This allowed banks to shift the risk of default off of themselves which made them much more willing to extend mortgage loans.

Even though Congress created FHA, FHA wasn’t funded by tax dollars.  Instead, FHA created a mortgage insurance system in which they charged insurance premiums to the home buyer and used that money to self-fund their costs and losses.  This system was put in place almost 80 years ago and, even with the challenges our housing market has faced, FHA still operates entirely from the insurance premium income today.

Fast Forward to Today

While FHA has been able to continue covering its costs with insurance premiums, it’s not nearly as solvent as it should be.  The FHA is expected to keep $2 in reserves for every $100 insured. As of November 2011, though, it held just 24 cents per $100 insured.  To try and  strengthen the reserves level, the FHA has raised its mortgage insurance premiums 4 times in the last 4 years.  Still, the solvency of FHA is a high concern for our economy as a whole.

Just how much of a concern is it?  It worries our elected officials so much that a whopping 98% of the House of Representatives voted to pass the Federal Housing Administration Fiscal Solvency Act of 2012 this fall.  This act, along with some additional changes being implemented by HUD, will impact FHA buyers in 2013.

What to expect in 2013

One key thing included in the FHA Fiscal Solvency Act is the permission for HUD to raise the monthly mortgage insurance premiums (MIP) being charged to buyers.  Currently, monthly MIP is set at 1.25% of the original loan amount per year.  For example, let’s say a buyer has a $100,000 FHA loan.  That buyer will pay $1,250 per year in MIP ($100,000 x 0.0125) which works out to $104.17 per month. 

The Solvency Act grants HUD permission to raise the annual MIP up to 2.05% if needed.  This would increase the MIP for our example above to $170.83 per month, which is quite a chunk on  a loan amount of only $100,000. 

While this is disturbing, even more disturbing is HUDs plans to no longer allow buyers to remove the annual MIP once their balance hits a certain level.  Currently, monthly MIP goes away once the balance hits 78% of the original price or 5 years has passed, whichever comes last.  HUD will be canceling this provision, meaning that mortgage insurance will stay on the loan as long as it exists, regardless of the balance.  MIP levels stay the same each month, even as the balance declines, so our $100,000 home buyer could still be paying $170.83/month in MIP even when the balance is down to $10,000 or less if they don’t pay the loan off or refinance it into a new loan.

What You Need to Do

While we don’t know exactly when these changes will take place, the expectation is early 2013.  Given this, a FHA buyer should do one of two things:

·        Become Conventional Eligible – FHA buyers typically use FHA financing because they need the flexibility it offers with credit history, income or down payment.  If you need it for one of these reasons, work with your lender to see if you can strengthen that weak area and make yourself eligible for conventional financing.  Conventional mortgage insurance is significantly lower and can typically be removed once you have 20% equity in your home.

·        Buy Now – if your situation is such that a conventional mortgage will not work for you, start home shopping in earnest.  If at all possible, you will want to close on your FHA loan before these changes are put in place.

If You Want to Know More

These changes look severe and, frankly, they are, but they won’t stop buyers from buying homes with FHA financing.  They will hopefully encourage buyers to explore their options more deeply, though, and not go with FHA just because it’s the first thing their lender suggests.

If you want to know more about the FHA vs. Conventional option for your unique situation, I can help you.  Feel free to give me a call at 574-234-5201, email me at lori.hiscock@ruoff.com or visit my website at www.SouthBendHomeLoan.com. 

You Have To Feed The Puppy

About two years ago, my daughter Jessica got puppy fever.  I blame it on our next door neighbor who got an adorable little black cockapoo.  It yipped a lot, but man was that dog cute.

But I digress…So Jessica had a case of puppy fever, and it was bad.  She knew the family rule though – if you want it, you save for it and buy it with your own money – so she did just that.  Week by week, she set aside her allowance until she finally had just enough money to cover the adoption fee for a rescue dog.  With her hard earned savings in a little Ziploc bag, she came to us with overflowing happiness believing that now now NOW she could finally have the doggie she wanted so much.

It’s moments like that that make my heart swell and break all at once.  I was so proud of her for working so hard for her goal and saving every penny she had to get that puppy, but I still had to ask her an important question “And how are you going to feed the puppy?”

Jessica’s face crashed in a second and tears started to bubble.  She’d worked for weeks and weeks to save up the money to get the puppy, but she hadn’t given any thought to taking care of it once she had it.  Seeing that realization hit her, I was hit with a realization of my own - My 10 year old daughter was very similar to my first time buyers.

I’ve worked with hundreds of first-time homebuyers through the years.  Much like my Jessica, they get incredibly motivated and excited about obtaining their goal. They want a home of their own and they work feverishly to save the money needed to make that dream come true.  Most of the time, though, they don’t think about the cost of actually owning the home beyond the basic mortgage payment.  They forget that they will need to ‘feed the puppy’. 

Being a good mom means asking the question, and so does being a good mortgage lender.  When I see my clients having to stretch so far just to get into the home, I have to raise the question of whether they will be able to take care of the home once they own it.  Just like puppies need food, homes need maintenance – shingles instead of shots, filters instead of flea collars - but additional ongoing costs, none-the-less.

Knowing this, I raise the question.  Being a good mom or mortgage lender doesn’t stop at asking the question though.  I also need to help build the answer.  Jessica and I sat down and figured out additional chores she could do to contribute to the cost of the puppy's maintenance.  Likewise, my homebuyers and I talk about the importance of a home maintenance fund and a home improvement fund.  We talk about budgeting and buying below their ceiling so that there is room in the family finances to take care of their home after they own it.

After we worked out a plan, Jessica got her puppy.  Cotton has brought a great deal of joy to our household in the two years since and, for the most part, Jessica has continued doing what she committed to do to contribute to the care of her dog. 

As for my first time buyers?  I can only pray that they also stick to the budgetary commitments they made to themselves so that they can care for their home and enjoy the pleasures of it for years to come.  Feed the puppy, take care of the home, and one can reap the joys for a lifetime.