Due to their ability to let potential San Diego home buyers purchase homes with as little as a 3.5% down payment, FHA-backed loans make up around 50% of the American home loan market according to FHA Commissioner David Stevens. FHA-backed loans are guaranteed by the Federal Housing Administration as long as borrowers meet their specific criteria, thus protecting lenders, even with small down payment loans.
Earlier this year, the FHA announced a few changes it will be making in order to build up its Mutual Mortgage Insurance fund. The agency aims to maintain a 2% reserve in its coffers, but is currently around -1.4% due to the recent housing crisis. By making changes to their fee structure, the FHA is able to reduce their risk and increase their income stream in order to reach their MMI target.
Increases in Mortgage Insurance Premiums
The majority of loans backed by the FHA will face an increase in their mortgage insurance premiums beginning on April 1st. For loans issued for an amount under $625,500, borrowers will pay an additional .10% (or ten basis points) annually on their MIP. For loans over $625,500, the increase is only .05% (or five basis points).
Borrowers Required to Pay MIP for the Life of the Loan
Currently, once borrowers of FHA-backed loans reach a 78% balance remaining on their initial loan amount, MIP is no longer charged to them. Starting on June 3rd, all new loans and refinances with a beginning amount greater than 90% of the property's appraised value will be charged for mortgage insurance for the life of the loan. Homes mortgaged for less than 90% of the appraised value will be cleared of their premiums after eleven years of payments.
While this may, at first, sound like a costly change over the life of your loan, it does not necessarily have to be. Depending on interest rate changes, refinancing your loan down the road once you have built equity in your home will eliminate the MIP and may be a wise financial choice.
Larger Down Payments Required for Jumbo Loans
A third major planned change to FHA policies is to increase the required down payment for jumbo loans over $625,500. Instead of the standard 3.5% down payment, these larger loans will be required to bring 5% to the closing table in the near future. This move will increase owner equity in properties associated with big loans, thus reducing the administration's risk.
While all of these changes sound costly, they result in relatively minor expenses to those borrowing to purchase San Diego real estate and are necessary for the continuation of the Federal Housing Administration. Recovery from the rise and decline of the housing market over the past decade has been a long process for the agency and by making these small increase on new loans, they will be able to remain financially solvent and ensure borrowers can purchase homes for as little as 3.5% down in the future.