The Real McCoy: What changes are coming to FHA loans?

By: Kari McCoy, Special to Gold Country News Service
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Dear Kari,

I am finally ready to buy my first home. I spoke with my father and he said that if I do not hurry, I will have to pay extra insurance on the life of my loan. What is he talking about?


It sounds like your father is referring to a Federal Housing Administration (FHA) loan. This is a mortgage insured by the FHA for lenders against borrower defaults. To be clear, the FHA does not provide the loan, it merely insures it for the lender. In the event of a borrower defaulting, the lender will not have to write off the loan because the FHA covers the loss. This helps the lender’s comfort level in lending. The FHA operates entirely from its own self-generated income and it costs the taxpayers nothing. It is good to note this program is not available for investors. The requirements state clearly it is intended for owner-occupied single-family homes, condos or a four family multi-complex, with at least one that is owner occupying.

FHA loans are not for everyone but they do offer benefits which could be helpful for some folks. Some of the requirements to obtain an FHA loan are: The last two years of income statements with the same amount of income or greater, two years worth of employment records, a credit report with minimal late payments within the last 12 months and a credit score of 620 or greater. However, credit scores between 600-619 are acceptable on a case-by-case basis. A bankruptcy must be at least two years old and a short sale three years old. The mortgage payment being applied for would normally have a debt-to-income ratio requirement of 31/43. However, the ratios can be exceeded with compensating factors. The lender also has the ability of running the loan through an automated system which will look at the overall credit depth which can allow debt-to-income ratios of more than 50 percent. A key item to note is a non-occupying co-signer can be added to the loan as backup in order to help with qualifying. The property and the location of the property must meet certain guidelines. There are also loan amount caps depending on the location of the property. A big plus is the loan may be assumable in the event the property owner sells.

When working with an FHA loan, there are two kinds of mortgage insurance premiums:

• Upfront mortgage insurance premium (PMI). This is an upfront monthly premium payment. The borrower will pay a premium of 1.75 percent of the home loan. In some cases this can be rolled into the mortgage.

• Annual PMI (monthly charge) is a monthly charge figured into the mortgage payment.

Change is coming: The FHA has announced mortgage insurance increases to take effect on all FHA mortgages with case numbers after April 1.

• Monthly Mortgage Insurance Premium (MIP) — 30 year loans greater than 95 percent will go from 1.25 percent to 1.35 percent and 15 year loans greater than 90 percent will go from .60 percent to .70 percent.

• No MIP Exemptions — 15 year loans with 78 percent loan to value or less will now have MI at .45 percent (previously these loans were exempt)..

• Duration of MIP – Those loans originated after June 3, at 90 percent or greater loan to value, will have MIP for the duration of the loan (previously 11 years).

With the old guidelines, the mortgage insurance is required to remain on the loan for five years. After April 1, the MIP stays on for the life of the loan.

Reach Kari McCoy at Lyon Real Estate, (916) 941-9540 or or