Ask Mark & Sheila: FHA Rule Changes

Written by Mark T Fiedler - The Mark and Sheila Team
March 27th, 2013

Q: I have been looking for a home to buy, maybe in Northern Meadows as soon as I have the down payment saved. I am prequalified for an FHA mortgage, which means I’ll only need to save 3.5% of the purchase price. My concern is that I’ve read that the FHA may be insolvent soon because of their foreclosure losses over the last few years. What should I do? Celestina in Rio Rancho

A: In November 2012, the FHA held a press conference and did indeed disclose that their capital reserve ratio of the MMI Fund (Mutual Mortgage Insurance) used to support FHA’s single family home and reverse mortgage insurance programs were at a negative 1.44 percent. Without explaining the math, their reserves against losses are well below where they should be. In spite of this, the FHA is backed by the federal government (that means you and me, the taxpayers) and they will not be defaulting anytime soon. However, the FHA mortgage program is supposed to be self sustaining, so they do have to make changes. Earlier in 2012 the FHA raised the amount paid for up front mortgage insurance from 1.25% of the loan amount to 1.75%. This increase started to rebuild the reserve funds, but it wasn’t enough.

FHA mortgage holders not only pay the up front mortgage insurance, but they also pay a monthly mortgage insurance fee. In 2012 the rules read that after at least five years and if the mortgage balance has fallen below 78% of the home’s value (based upon the scheduled principal reduction), a borrower could stop paying the monthly mortgage insurance. On a $150,000 mortgage, would mean a reduction in the mortgage payment of $156.25 (at the 1.25% rate). On January 31, 2013 the FHA announced that they were making the monthly mortgage insurance permanent on all their new loans. Starting June 1st, 2013, new FHA loan holders will contribute this money every month for as long as the loan stays in place. The amount of the monthly mortgage premium payments will also go up by about 8% on new loans starting April 1st, 2013. (The above effective dates are not the date the transaction closes, but the date the lender gets a new case number for your loan in process.) These permanent payments will help rebuild the FHA reserves. If you are considering making a purchase utilizing FHA financing, you might want to get off the fence and find a home prior to this policy change going into effect. If you already have an FHA loan, the original terms will not be changing.

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