FHA Loans Will Become More Costly

FHA loans have become a stalwart of financing in the last few years (upwards of 35% of the mortgage market) as conventional mortgages became more difficult to qualify for and down payment reserves were more scarce for buyers. The attractiveness of financing with just 3.5% down has been a huge benefit for many buyers recently. However, now FHA loans will require mortgage insurance to be paid not only while equity in a home remains below 78%, but for the life of the loan and the rate is increasing for the fifth time in the last four years. Previously as a buyer paid down the principal and/or a property increased in value to make its loan balance at 78% of the home’s value the insurance premium could be cancelled, making the monthly payment decrease for a borrower. Due to their projected need for additional revenue the Federal Housing Administration has determined this new permanent mortgage insurance for the life of the loan is their best avenue to sure up their finances. Unfortunately this will negatively impact a lot of buyers.

One result of this policy change that we should see is an increase of buyer’s choosing conventional financing which typically necessitates a 5% down payment. While this may make purchases more difficult for a buyer it will likely make financial sense to save up the additional 1.5% down payment over the long term. Traditional private mortgage insurance is not needed when a home’s loan balance is at 80% of the value. In fact, private mortgage insurers are required by law to cancel mortgage insurance once this threshold has been met but the FHA is specifically exempted from this law.

As we’ve often mentioned this is why the relationship between a buyer, agent, and lender is so vitally important to determine which loan program is of most benefit for each buyer’s circumstances.

Stephen Woodall
REALTOR, GRI @ Long Realty Company
Stephen has made real estate his full-time career and passion since 2008, primarily specializing in the Foothills & the Northwest Tucson areas of Oro Valley and Marana. He is a multi-million dollar producer, representing both sellers & buyers. Stephen has tremendous experience in new home sales, listing & selling primary residences, listing & selling vacant land, listing & selling luxury homes, investment properties, rentals, and real estate development parcels.

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