If you want to buy a house with minimal cash by using an FHA-insured mortgage, here's some sobering news: Thanks to an ongoing series of fee increases and underwriting tweaks - the most recent of which were announced Jan. 31 - FHA is getting steadily more expensive, and may not work for you.
FHA is the Federal Housing Administration, the largest source of low-down-payment mortgage money in the country. Its minimum down is just 3.5 percent, compared with anywhere from 5 percent to 20 percent or higher from conventional, non-government sources. For decades, FHA's affordable financing has made homeownership possible for first-time buyers with modest incomes and credit history blemishes.
But in the wake of losses tied to bad loans insured during the housing bust years, FHA has been raising its loan insurance fees and backing more loans to applicants with higher credit scores. With the latest increases, things have gotten to the point where some lenders wonder whether the agency is trying to move away from its traditional customers.
Dennis C. Smith, broker and co-owner of Stratis Financial Corp. in Huntington Beach, Calif., is blunt: "I think FHA is putting itself out of business with the moves they've made in the past couple of years."
While they wouldn't agree with that assessment, FHA's top officials readily admit that their priority is not growing market share but protecting the agency's multibillion-dollar insurance fund reserves and cutting losses.
Starting April 1, FHA's annual mortgage insurance premiums for most new loans will jump by one-tenth of a percentage point (10 basis points in lending parlance). This is on top of two previous increases since 2011. Other coming changes, but not scheduled to take effect until June 3, include: mandatory "manual" underwriting of applications by borrowers whose total household debt-to-income ratios exceed 43 percent and who have credit scores below 620; and mandatory 5 percent minimum down payments on FHA loans above $625,500 in high-cost areas such as California, metropolitan Washington, D.C., and others.
FHA also announced that as of June 3, it is rescinding its popular policy of canceling mortgage insurance premium charges for borrowers once their loan balance declines to 78 percent of the original amount. This will force FHA customers to pay premiums for as long as they keep their loans, and is in stark contrast to the private mortgage insurance market, where homeowners can request cancellation of premium payments once their loans hit the 78 percent mark.
"That stinks," said Steve Stamets, a mortgage officer with Apex Home Loans in Rockville, Md. "It's just a money grab" that will cause creditworthy borrowers to avoid FHA and seek out low-down-payment alternatives through Fannie Mae and Freddie Mac, using private mortgage insurance.
Already, said Stamets, FHA is the more expensive option for many borrowers who have good credit but don't want to make hefty down payments. With FHA's new fees, for example, Stamets estimates that an applicant with a 720 FICO score making a 3.5 percent down payment on a $250,000 fixed rate 30-year FHA mortgage will pay $144.66 more a month than a borrower with the same credit score on a conventional loan of the same amount with a 5 percent down payment and private mortgage insurance. Even with a 680 credit score, the conventional loan is cheaper by $85 a month - based on FHA's new fee levels, said Stamets, and those monthly premium payments can be canceled at the 78 percent loan-to-value level whereas FHA will keep charging them for the life of the mortgage.
Steven R. Maizes, managing director of mortgage banking for Mortgage Capital Partners Inc. in Los Angeles, says FHA's new fees and policies are likely to cost the agency valuable, low-risk business on refinancings. Maizes recently ran a spreadsheet analysis for a client with a $460,000 FHA loan at 5 percent. Even with a 1.5-point rate reduction, the added fees caused the monthly payment to decrease by just $97.11.
"If you couple that (small saving) with the fact that the mortgage insurance payment can never go away," he said, refinancing an existing FHA loan for a creditworthy borrower into a new FHA loan will be tough to justify.
Bottom line for you: Make sure your loan officer runs the numbers comparing FHA with privately insured conventional alternatives. You may not want to be saddled indefinitely with higher payments - and no right to cancel.
Kenneth Harney's email address is firstname.lastname@example.org