First 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.
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Check out our article in Common Interest magazine on page 19!