As of June 3, 2013, all new FHA loans will undergo some significant changes that could cost homebuyers a lot of money.
The change is one of the most dramatic in recent years, as FHA has fallen on hard times and needs to take action to shore up its finances.
Here’s what will happen for all new loans that have FHA case numbers established on or after June 3, 2013:
- For new loans at 90% loan-to-value or less (more than 10% down), the monthly mortgage insurance premium will be payable for at least 11 years.
- For new loans at more than 90% loan-to-value (less than 10% down), the monthly mortgage insurance will be payable for the life of the loan.
These are big changes for the FHA program. FHA currently allows mortgage insurance to be canceled when two conditions are met:
- The mortgage insurance has been paid for 5 years
- The loan balance reaches 78% of the original purchase price or value of the home
At a minimum, mortgage insurance will be required for an additional six years. But for the majority of FHA buyers, who put the minimum 3.5% down, FHA mortgage insurance will be payable for the life of the loan. That could add up to thousands of extra dollars.
Avoid permanent mortgage insurance by getting a case number by June 1
A very confusing topic for new homebuyers is the FHA case number. In brief, the case number is the number that tells FHA your loan exists. The lender requests this number via FHA’s website when you have a property identified and have applied for the mortgage.
If your lender can pull a case number by 8pm Eastern time on June 1st, 2013, you will avoid the changes. Why June 1st instead of June 2nd? Because June 2nd is a Sunday, and FHA’s case number website is closed on Sundays. Keep in mind this disclaimer on FHA’s site regarding their case number website hours: “HUD reserves the right to change the schedule as necessary due to unforeseen events.”
If you have a property identified and have made an application with your lender, make sure your loan officer pulls a case number early. In recent years, FHA’s case number website has been known to crash the day before a big change, due to a nationwide rush for case numbers. Don’t let your lender wait until the last minute.
Better yet, apply here today and get your case number immediately.
If you have not found a property or applied for the mortgage yet, you may wish to do so in the coming weeks. It’s a great idea to get pre-approved so you’re ready to obtain a case number when you find a property.
Of course, it’s not worth settling on a home you know will not suit you, just to avoid the mortgage insurance changes. Buying the wrong home can be more expensive than less-favorable terms on a mortgage.
What if I don’t get a case number by June 1?
Keep in mind that it’s not the end of the world if your loan is subject to the new rules. There’s a chance you could refinance into a conventional loan later on when you’ve established equity, removing your mortgage insurance.
Consider putting 5% down on a conventional loan with private mortgage insurance. Also, the USDA home loan is a great option for borrowers with little or no money to put down on a home.
If you have fair or poor credit, FHA may be the only option for you. But, in the grand scheme of things, FHA still allows you to buy a home when you might not otherwise have been able to.
Paying mortgage insurance for the life of the loan may be a small price to pay, considering you own your home, have a great interest rate, don’t have to worry about increasing rents, and benefit from the home’s appreciation.
Even with the changes, FHA is still one of the most flexible and accessible loan products on the market today, and homebuyers shouldn’t be scared away by the changes.