FHA loans just got a lot cheaper.
Current FHA rates recently hit 20-month lows and are in the low- to mid-3s. As a bonus, monthly mortgage insurance costs for FHA purchase and refinance transactions just dropped by 35%.
It’s a golden opportunity to buy a home with an FHA loan or reduce costs with an FHA streamline refinance.
FHA loans lost market share starting in April 2013 when mortgage insurance for the program became payable for the life of the loan.
While that’s still the case, the cost of monthly FHA MIP has dropped from 1.35% to 0.85%. That’s a savings of $40 per month for each $100,000 borrowed. FHA MIP costs are now comparable to those of conventional loans for many borrowers.
And, homeowners are finding it easy to refinance into a conventional loan after making the initial home purchase with FHA. When their value goes up, they simply refinance to cancel their FHA mortgage insurance.
These are just a few reasons FHA could make a big comeback in 2015.
Lower Costs on the FHA Streamline Refinance
The FHA streamline is an easy way for current FHA homeowners to drop their rate and payment. It requires no appraisal and no income documentation.
A credit check and verification of closing costs are main requirements, and even these are lenient.
The borrower must demonstrate a good payment history on their FHA loan by showing no more than one payment that was more than 30 days late in the last 12 months. Credit score minimums generally range from 620 to 640 depending on lender.
The borrower must also pay any closing costs the lender does not cover. But many lenders are willing to pay for these costs so that the refinance requires zero out of the borrower’s pocket.
An FHA streamline refinance will save FHA homeowners money in two ways.
First, rates are most likely lower now than when the borrower purchased the home. Today’s FHA mortgage rates have not been available since May 2013. Anyone who bought a home after that point probably has a higher rate and could save money each month with a refinance.
A homeowner with a $200,000 loan could save $110 per month by dropping their rate by 1%. But that’s not the only way the borrower will save.
The second portion of savings will come from FHA MIP reductions.
Recently, FHA announced its monthly mortgage insurance premiums would drop from 1.35% to 0.85%. The move is in response to worries that FHA costs were too high, restricting homeownership. FHA’s core value is to help low and median income buyers to qualify for homes they would not otherwise qualify for. Yet, mortgage insurance premiums had risen seven times in as many years. Reduced FHA MIP was a welcome change.
Home buyers are not the only ones to benefit. The cost roll back also applies to refinances. That means refinancing households could save as much from reduced FHA MIP as the lower rate.
On a $200,000 loan, the MIP savings are $80 per month and combined savings approach $200 per month.
FHA Home Purchase Savings
The FHA loan program was set up during the Great Depression as a means for renters to own their own homes. To this day, FHA continues to help underprivileged buyers. Those with less than perfect credit or below-average income often qualify.
The same buyers would most likely not qualify for conventional loans. FHA requires just a 3.5% down payment. While Fannie Mae and Freddie Mac now offer a 3% down payment option, the borrower must have very good credit to qualify.
Not so with FHA. The borrower is often permitted to have occasional late payments or collections on their credit report. Still, only a 3.5% down payment is required.
Yet, rising FHA costs were hindering the same buyers the program was trying to help. The only solution was to reverse the trend of ever-rising mortgage insurance premiums.
The result is an FHA loan that is dramatically cheaper.
The average home price in the U.S. was $252,800 in November according to the National Association of Realtors®. At this price, a home buyer will save $100 per month. Lower FHA premiums could mean an approval for many buyers when they couldn’t qualify just a few months before.
Buyers can now afford more as well. Many areas of the country are experiencing very tight housing inventory. Affordable homes are hard to find. The second they go on the market, they’re gone. Buyers are forced to increase the price they planned on paying.
Lower FHA MIP will help these buyers. Someone with an FHA approval for $250,000 at previous mortgage insurance costs could now qualify for $270,000 with no increase in monthly payment. In some markets, that opens up a world of opportunities.
FHA on Rebound
Now that FHA loans are much cheaper, the market should experience increased FHA loan volumes. The White House estimates that 250,000 new home buyers could enter the market.
More buyers could opt for FHA rather than conventional. The cost for some borrowers could be about the same.
Starting in January 2015, new home buyers can apply for FHA loans with lower premiums. Buyers are encouraged to apply early. There could be a rush on FHA lenders in 2015.