Why Pioneer Valley home buyers should apply for FHA loans before spring Reply

Pioneer Valley home buyers may want to consider calling their local lender and getting themselves approved for a FHA mortgage and assigned a FHA case number before April 1, 2013.  Federal Housing Administration mortgages, also known as FHA loans, are about to become more expensive over the term of the loan than conventional mortgages as part of an effort to bolster FHA’s capital reserves.

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs,” FHA Commissioner Carol Galante said in a press release. “In addition to protecting the MMI fund (Mutual Mortgage Insurance Fund), these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American home buyers.”

Late last year, it was reported that FHA saw $16.3 billion in losses.

FHA loans are more affordable when making a purchase because they require only a 3.5% down payment and, for most borrowers, this will not change. However, there will be an increase in cost over the term of the loan for those who get assigned an FHA case number on and after April 1, 2013.  The amount of MIP, which is a fee added to your monthly mortgage payment to insure a mortgage in case of a default, will increase .10%.  In effect, this will basically add 1.35% to the interest rate of most FHA loans.

Yahoo Finance put the impact that the increase in mortgage insurance premiums have on monthly mortgage payments this way: “For example: 135 basis points on a $200,000 mortgage is $225 per month.  In a high cost area like California [or Amherst and Northampton], it would mean $562.50 added to the monthly cost of a $500,000 loan.”

FHA will also be requiring that mortgage insurance premiums (MIP) be paid on the principal balance over the life of the loan for loans assigned an FHA case number on or before June 3, 2013.

So if you want to avoid being required to pay for mortgage premium insurance over the life of an FHA mortgage, get yourself assigned an FHA case number assigned before June 3, 2013. If you want to avoid higher MIP and avoid paying for MIP over the life of the loan, get yourself assigned an FHA case number before April 1, 2013.

It used to be that MIP was no longer required once the principal balance was 78% of the original loan.   By requiring MIP throughout the course of the loan, the costs of the loan will increase as much as tens of thousands of dollars over time.

The new FHA loan rules will also require that lenders manually underwrite loans with a credit score below 620 and a debt-to-income ratio greater than 43%.  What is more, loans above $625,500 will now require a 5% down payment, rather than 3.5%.

If you are planning on buying a Pioneer Valley home, make your first call to Michael Seward at 413-531-7129.


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