You may or may not have heard the FHA is once again making their insured loans for purchasing or refinancing higher for consumers for all case numbers issued June 1, 2013 or after. These changes will limit borrowing power and will place a heavier emphasis on income to offset the liability, i.e. higher mortgage payment.
Current FHA Requirements in place
No matter what down payment or equity position, monthly mortgage insurance is required for 60 months, after which, if there is 20% or more equity in the property the consumer has the ability to petition to their lender for the removal of the monthly mortgage insurance payment. It is up to the lender’s discretion on whether or not they will remove the mortgage mortgage insurance.
June 1, 2013 FHA Mortgage Insurance change
The change affects all loans taken out June 1, 2013 onward. For any loan with less than 10% down or 10% equity, monthly mortgage insurance will remain in effect throughout the entire duration of the life of the loan. In other words, the monthly mortgage insurance payment becomes permanent. No longer will borrowers be able to petition to have the monthly mortgage insurance removed after 60 months and 20% equity.
For all FHA Loans with ten or percent equity in the transaction, same rules will apply 60 months of mortgage payments paid to the Federal Housing Administration, and 20% equity borrower, can petition the monthly mortgage insurance to be removed.
What these changes mean for consumers purchasing or refinancing real estate
This is move by the FHA, is constrictive because it limits a borrowers ability to borrow and removes the prospectus for a future payment reduction by virtue of amassed home-equity in the future. Moving forward, borrowers will need to provide more income to offset the liability, increase their down payment to 10% or more to have the same ability in the future people have now prior to June 1, 2013.
This action will force consumers to strongly consider working with a Conventional Mortgage which has significantly lower mortgage insurance premiums and no five year waiting time to get out of the monthly mortgage insurance payment. While qualifying for a Conventional Mortgage is more challenging, the long-term cost benefits compared to these increases in the FHA variety, draw a clear line in the sand between the high cost and a low-cost mortgage.
If you’re looking for a mortgage to finance a home, you can start with us online today with no obligation by getting a complementary mortgage rate quote.