FHA Condo Approval Specialist: FHA Lifetime Mortgage Insurance is Garbage

FHA Lifetime Mortgage Insurance is Garbage

FHA Lifetime Mortgage Insurance is Garbage

fha mortgage insuranceFirst off, let me say that I understand the need for mortgage insurance.  Before the creation of mortgage insurance, lenders required a 20% down payment to lend money to purchase a home.   Were those standards still in place, the homeowners in America would be cut to a fraction of what it is now.

Over the years, HUD – in which FHA is housed within the Federal Government, no pun intended – has modified various aspects of its lending programs in an attempt to mitigate risk to the Insurance Fund.  One of the most common methods is by adjusting the mortgage insurance premiums.

To cover significant payouts from its insurance fund during the housing bubble collapse, FHA has raised its premiums.  FHA’s most recent changes were to raise the Monthly Mortgage Insurance premium, or MMI, AND collect it for the life of the loan, or up to 30 years.

I say that the latter is garbage for a few reasons.

First, when a borrower used an FHA loan with the minimum down payment of 3.5%, it would traditionally take 12-13 years for the MMI payment to “drop off” when the principal buy down hit the 78% mark.  This is not impacted by housing market price fluctuations.

Because the average homeowner moves every 7-10 years, the MMI was already for the life of the loan for these borrowers.  For FHA loans, the average life of a loan is around 8 years.  This means that removing the termination of the MMI at 78% equity doesn’t affect these borrowers.

Which brings me to the other side of this: FHA is needlessly scaring borrowers away from its loan products.  Making MMI for the entire 30 years impacts a minority of borrowers yet, when potential homebuyers are searching for a loan, the perception makes the FHA programs less attractive.

What they don’t realize is that they will probably be moving within 10 years and they would have had MMI for their life of their loan anyways.  This is especially true of first-time buyers and those who purchase condominiums.  It is not common for folks to buy a starter home or condo unit and live there for 30 years.

The only reason I can see why FHA might have made this change is because interest rates are so low.  Were interest rates higher, borrowers could refinance into conventional loans with no MMI when rates came down and saved money.  Since we can all expect that interest rates will be going up soon, this option will not be as readily available.

However, historically, people still sell their homes and move every 7-10 years.  We can think back to when interest rates were 5 times what they are now, folks were still buying and selling homes. 

FHA lifetime mortgage is garbage because it affects so few but the perception of it has become a deterrent to using the program.  To me, it doesn’t appear that HUD has thought this through.  I know that there is at least discussion within HUD about the impact of the attractiveness to FHA’s home loan program.  Hopefully, we will see changes to this in the future.

 Image courtest of Grant Cochrane/freedigitalphotos.net

The Condominium Project Approval Team at ReadySetLoan is dedicated to helping condominium projects across the nation to obtain their approvals with FHA and the VA or become recertified with FHA.  We have assisted nearly 200 condominiums and we can help your association.

 

ReadySetLoan is an active member of the Connecticut and New England chapters of the Community Associations Institute (CAI) and is a frequent contributor to Common Interest Magazine as an expert in FHA/VA condominium project approvals.

 

Please contact us with any questions regarding FHA or VA condominium project approvals.  You can email me at askeric@readysetloan.com or call me at 404-433-4565. I will be happy to answer any of your questions.

 


FHA/VA Condo Approval Specialist

404-433-4565 Cell Phone

860-644-3772 Fax Phone

eric.boucher@readysetloan.com
ready set loan condo team

 

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Comments

Most of what comes out of congress is garbage Eric.

Posted by Conrad Allen, Webster, Ma, Realtor (Re/Max Professional Associates) about 4 years ago

Suggested!  and I agree with Conrad. lol I have buyers who made it in under the wire before the change and I even put an alert in my calendar to call them to get them to re-appraise and get them off of it asap.

Posted by Chris Griffith, Bonita Springs Listing Agent (Downing-Frye Realty, Bonita Springs, FL) about 4 years ago

Good morning Eric. It is one of the great American ripoff's. Until this changes, I educated my clients about refinancing into a conventional mortgage in the future. I have already done a couple, that were actually 203K loans, that gained equity because of the renovations.

Make it a great week!

Posted by Joe Petrowsky, Your Mortgage Consultant for Life (Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709) about 4 years ago

I just don't understand why HUD would do anything to scare away future home owners. It's guys like you Eric, who we need to help buyers be educated about things like this. 

Posted by Suzanne Otto, Your Montgomery County PA home stager (Six Twenty Designs) about 4 years ago

It is all a numbers game. The Feds (FHA) are trying to show they are recovering the losses and they will use the MMI projected to be received if every loan went 30 years.

The same way Congress balances the budget or reduces spending......flase numbers, lies and trickery.

Posted by Than Maynard, Broker - Licensed to List & Sell - 405-990-8862 (Coldwell Banker Heart of Oklahoma) about 4 years ago

I can always count on you for an amusing comment, Conrad

Chris - thank you for suggesting.  In my understanding, Chris, FHA mortgage insurance can't be eliminated by an increase in equity because the 78% is based on the original purchase price.  They would have to refinance.

That is an excellent strategy, Joe

Thank you, Suzanne.  I do my best!

Than, what annoys me is that the Insurance Fund has recovered.  I know that FHA only wishes to capture a certain market share but needlessly scaring off borrowers under the guise of lifetime MMI is silly.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

Eric-I don't have any studies to back it up but there are people who buy and never more. Can't tell the percentage but there are people in several neighborhoods who are not moving every 7-10 years. Agree with your premise though that the lifetime fee is hurting the market.

Posted by Wayne Johnson, San Antonio REALTOR, San Antonio Homes For Sale (Coldwell Banker D'Ann Harper REALTORS®) about 4 years ago

Absolutely, Wayne.  Those buyers are certainly impacted by lifetime MMI, but I think that you would agree that nationally, these are the minority of homebuyers.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

It doesn't bother me as FHA is trying to reduce the profile they had when they were used to keep housing together after 2007. As long as we keep Fannie and Freddie going with a government backstop to insure we still have 30 year mortgages and 5% down that is the way we will advise out clients and FHA can get back to their original mission which is to take the less qualified and put them into a home.

Posted by Joe Pryor, REALTOR® - Oklahoma Investment Properties (The Virtual Real Estate Team) about 4 years ago

Hi Eric, I think you are right that they "see" the current low interest rate environment as going away sometime in the future, and their rate even with MI will be low enough to thwart re-financing for a better rate.

Bill Roberts

Posted by Bill Roberts, "Baby Boomer" Retirement Planner (Brooks and Dunphy Real Estate) about 4 years ago

Certainly, Joe.  They were over-utilized and the Insurance Fund suffered for it.

That is a great point Bill. With the low rates offsetting the high MI, the higher rates may later be offset by lower MI.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

I heard the FHA increase in fees is to pay for Obamacare. The lifetime MI makes FHA loans more unappealing. I tell buyer clients if they are military or veteran to use their VA benefit for a VA loan instead, which is far better than FHA loa. 

Posted by Pamela Seley, Residential Real Estate Agent serving SW RivCo CA (West Coast Realty Division) about 4 years ago

You are right on. The big increases in the annual mi have already served as a reason for going with Conventional financing when possible. But lifetime mi? It will generate refi opportunities in the future, just like the high FHA mi is doing now.

Posted by Tim Storm, Orange County FHA and VA Home Loan Specialist (Home Point Financial) about 4 years ago

Thank you for sharing. I always learn something from your posts.

Posted by Gita Bantwal, REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel (RE/MAX Centre Realtors) about 4 years ago

Pamela - I can neither confirm nor deny your statement about paying for Obamacare.  I can tell you that the rise in Fannie Mae's "adders" (which increase interest rates) was due to the decrease in the payroll tax.  And a VA loan is THE BEST option for those who qualify.

No doubt, Tim.  My concern is that the perception of "lifetime" MI is deterring folks from using the program altogether.

Thank you very much Gita.  That means a lot coming from someone who is so knowledgeable and well-read! 

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

it isn't the lifetime factor that bothers me (because of your reason above) but the 1.35% or lets say 1.3 for a 95.... I think they need to toss in some risk based pricing to the MIP calculator so the higher credit score buyers are not subsidising the low score buyers. MIP is almost triple what a high credit score 5% down conventional buyer can obtain

Posted by Robert Rauf (HomeBridge Financial Services (NJ)) about 4 years ago

Robert - I completely agree with you on that regard and that is a whole different topic, especially now that the Insurance Fund is back to an adequate level.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

Robert- I agree most people would be paying MIP for the life of THIER loan especially if they are a first time buyer. To off set the higher payment FHA has pushed buyers into the FHA 5/ 1 Arm. This helps with their payment noting the  first time it will adjust is  in year 6 by 1 point up or down. So it will take 8 years to be at todays fixed rate. Seems like this is what they were trying to avoid in loans but then pushed preople right to it!

Posted by Patty Blackwelder, Top Producing Realtor-New Home Buyer Specialist (Twins Selling Real Estate) about 4 years ago

Hi Patty, traditionally, most FHA borrowers saw MMI for the life of their loans because their loans only lasted 10 years or less.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

Eric, one more disastrous move from FHA!

FHA has made it more difficult for borrowers anyways!

Posted by Praful Thakkar, Andover, MA: Andover Luxury Homes For Sale (LAER Realty Partners) about 4 years ago

Borrowers can also refinance to a non-FHA product to remove the MMI as well. Depending on the market and rates after 5-10 years it may be better to refi and move into a 15 year loan anyway. 

Posted by Marc McMaster, Putting my clients before myself (RE/MAX Centre Realty) about 4 years ago

I agree with you, it is garbage and I recommend that people refi as soon as they possibly can to get rid of it!

Posted by Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional, Palm Harbor, Dunedin, Clearwater, Safety Harbor (Charles Rutenberg Realty) about 4 years ago

Praful - the difficulty in getting a loan with FHA is by design.  FHA's risk tolerances were based on a 10-15% market share.  In 2008/2009, it was around 40%.

Marc - hopefully rates don't go too high to eliminate the benefits of refinancing

Barbara-Jo & Corinna - refinancing can be a great option.

Posted by ReadySetLoan Condo Approval Team, The FHA/VA Condo Project Approval Specialists (ReadySetLoan Condo Team LLC) about 4 years ago

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