Trump Repeals FHA Premium Reduction – Here are the FACTS

If you’ve opened up CNBC or checked your Facebook wall, you may have seen articles and messages about President Trump repealing the reduction in FHA premiums. While some articles simply explained this fact, most articles have been presented in such a way that you might think anyone getting a FHA mortgage is left out in the cold. One of my agents even called me worried about how this might affect her client who is getting ready to close with an FHA loan. In order to put the speculation and worry to rest I thought I’d write a short blog explaining what happened with regard to President Trump and the FHA mortgage premium.

First let me give you a quick run down on what an FHA loan is. A FHA loan is a home loan that is insured by the FHA, Federal Housing Administration. Borrowers pay an insurance premium to FHA which protects lender from a borrower default. Typically FHA loans have less strict requirements than other loans and in many cases allow for a smaller down payment. However, borrows must pay a mortgage insurance premium on a monthly basis.

On January 9th a reduction in FHA insurance premiums was passed lessening the insurance premium by 0.25%. This was set to go into place on January 20th. President Trump instead repealed this and froze the current premiums in place.

The NAR along with other organizations said that in 2017 roughly 40,000 would be home owners may no longer be eligible for an FHA loan because this decrease was repealed. Many news organizations and online columnists have since written articles with headlines and opening paragraphs that make it sound as if there were 40,000 people under contract for homes and now they won’t be able to purchase. Nothing can be farther from the truth.

For anyone considering an FHA loan that might be freaking out right now…don’t worry, relax! Calm down. Here are the facts.

The FHA premium reduction would have saved the average FHA borrower $500 per year which works out to roughly. $42 per month. If you want to equate it to loan value, the premium savings on a $200,000 loan would have been $29 per month.

However if you were quoted a FHA loan price your payment is not going up. The FHA premium reduction was not set to take place until January 20th. Underwriting was not being used to qualify people under the new guidelines. If you were set to close on a home you’re still OK because you were quoted at the old price.

Reporters and columnists can argue all day long whether or not the FHA should lower premiums. However, writing articles especially with catchy headlines to imply many people can no longer purchase homes is down right unethical and detrimental to our industry as whole. Understanding the facts of this change is what is most important and not furthering a political agenda or increasing readership a website.

If you want to know more about the cost of a FHA loan simply call a Realtor or a great mortgage broker. In addition to FHA loans there are MANY great FHA alternative programs that can be even cheaper with similar down-payment and qualifications. Don’t let all these online media sources scare you away from looking into purchasing a home.

Obama’s FHA Insurance Premium Cut EXPLAINED

All over the news the past couple of days has been the fact that President Obama announced a cut to the FHA Insurance Premium. Rhetoric from both sides of the isle may have you confused as to what this means, whether you are in the real estate market or not.

A FHA loan, is simply a loan that is INSURED by the FHA (Federal Housing Authority). FHA guidelines are such that allow lower down payments and more flexibility on basic qualifications than traditional lenders. Typically, whenever you put less than 20% down, you must acquire mortgage insurance. Even if you were not getting a loan insured by the FHA, you would still need to purchase mortgage insurance. Mortgage insurance is typically priced as a percentage and added onto your payment every month.

For example. If you had a loan that was only 10% down through Chase Bank you would need mortgage insurance. Your interest rate on a 30 Year Fixed may be 4%, but the mortgage insurance premium might be .7%. Therefore, at the end of the day, your effective payment would be 4.7% (now these are very simplistic terms as it is a bit more complicated than this, but this is the basics of it).

FHA Insurance has been considerably higher than standard mortgage insurance. The result of this has been those who would normally get an FHA loan have decided not to and instead go with a loan that only requires private mortgage insurance, provided that they can qualify for such a loan. What are the FHA Premiums and what will be the new premiums?

The old FHA premium was 1.35%. Yes, that’s right, 1.35%. That means that if the lender gave you a rate of 4% on your FHA insured loan, then your effective rate, with the FHA insurance would end up being 5.35%. On top of this monthly premium, FHA also requires an up front premium of 1.75% of the total loan value. Meaning that if the loan value was $100,000 then you would have an additional cost at closing of $1,750.

The new FHA premium that will be introduced will be cut by .5, meaning it will now be .85%. This is a big difference as it now puts FHA within the realm of private mortgage insurance (but still at the high end of it). The 1.75% up front premium, however, is not slated to go away.

At the end of the day this means that the average FHA borrower will save roughly $900 per year. While it is not a lot of money, for first time home buyers that $75/80 per month could help push them off the fence from renting to buying.

At the end of the day, this means that there are more options for borrowers today which will hopefully mean more buyers will enter the market to help continue the growth of a stable, healthy real estate market.

 

Paul Blackburn is an Illinois licensed Realtor and Broker with @properties. He can be reached anytime via e-mail at Paul@PKBlackburn.com