In the last two years, the Federal Housing Administration (FHA) has increased the cost of FHA mortgage insurance several times. These increases affect the recurring monthly cost of FHA-insured mortgages and upfront cost.
Increased Up-Front & Monthly Mortgage Insurance Costs
In one of the increases in 2012, the cost of upfront mortgage insurance premium (UFMIP) was raised by 75 basis points from 1.00 percent to 1.75 percent. The agency also increased the cost of annual mortgage insurance premium (MIP), paid by borrowers on a monthly basis, by 10 basis points or .1 percent.
Who is Affected?
New refinance borrowers and single-family homebuyers who do not qualify for an FHA “streamline refinance” were the ones most affected. If you already had an FHA loan back then, you didn’t see any change to your insurance premiums. In a strange twist though, certain Streamline Refinance borrowers actually saw a decrease in the cost of UFMIP and were not subject to the increase in annual MIP. As long as the loan being refinanced was endorsed on or prior to May 31, 2009, UFMIP for a streamline refinance fell from 1 percent to .1 percent. This decrease, however, didn’t take place until after June 11, 2012.
How Does the Increase Affect FHA Homebuyers?
Assuming a $200,000 loan amount, the upfront cost has increased then by $1500 and monthly payments has increased by an additional $17 a month. Fortunately, however, the upfront cost didn’t necessarily need to come out of your pocket because the FHA still allowed you to finance upfront costs into the loan amount. Ultimately though, you will pay the bill to the tune of an extra $8,578 in combined costs over the life of a 30-year loan at 4 percent.
So with these rate hikes in the upfront cost of FHA insurance in the last two years, it begs the question, are there options out there on the market that are better than an FHA loan? Fair question, let’s examine the options.
Why go FHA?
When it comes to particular lending criteria, the FHA is the only game in town. For example, FHA only requires a 3.5 percent down payment and they allow that down payment to be from flexible sources, such as a gift from a friend or family member. With most other options, you need to come up with at least 5 percent to 10 percent of the purchase price and those funds most likely need to be from your own savings, no gifts allowed. FHA is also more liberal in terms of standards for credit and income. If your debt-to-income is higher than 40 percent or your FICO score is less than a 680, then an FHA loan is probably your best choice.
Option 1: Private Mortgage Insurance
What is PMI? If you have fairly good credit, a decent income and your own down payment in the bank, you might want to consider a conventional loan with private mortgage insurance (PMI). The PMI companies have eased their lending standards since the housing bust. In fact, a few PMI companies are looking to aggressively book new insurance to offset the claims that they’ve paid out in the last few years. In comparison to FHA insurance, PMI usually has no upfront cost and the monthly premium is comparable. The downside of PMI is that you could have two underwriters reviewing your loan which not only adds time but also the possibility that your loan could be disapproved.
Option 2: Piggyback Second Mortgage
Similar to PMI companies, credit unions and banks are starting to dip their feet back into the second mortgage lending waters once again. A second mortgage can be a terrific way to eliminate the need for mortgage insurance altogether. With a piggyback second mortgage, you might get a first mortgage up to 80 percent LTV (loan to value) and then add a second mortgage up to 90 percent combined LTV. The downside though is that you’ll need to have a much larger down payment —at least 10 percent and the availability of piggyback second mortgages is still extremely limited in less stable real estate markets.