We've already seen once change to loans from the Federal Housing Administration (FHA) this year, and we're preparing for another on June 3rd. The month of April brought new, more expensive Mortgage Insurance Premiums to homebuyers seeking FHA loans. Now, borrowers in the San Diego real estate market and across the nation are about to find new changes in place to the length of time that they are required to make MIP payments, and anyone who has had experience with an FHA loan in the past will notice some big differences on the horizon.
Current FHA Rules
Currently, MIP is required on all FHA loans with a loan-to-value (LTV) greater than 78% of the most recent valuation of the property. That means, if you borrow more than 78% of the home's value (or if you have less than a 22% down payment or equity) you'll be paying mortgage insurance premiums. This is in place until you pay down the loan under 78%, and have made a minimum of 60 payments (for loans greater than 15 years in term). At that point, the MIP is automatically removed from the loan, and many people discover themselves saving noticeable amounts each month.
What's Changing with FHA Loans?
Beginning on June 3rd, borrowers will be finding themselves making mortgage insurance premium payments much longer. New loans from the FHA will abandon a slightly more complicated system for identifying MIP payment length, and force all new loans to make these premium payments for either 11 years, or the life of the loan. Now, loans which are made on a property with a LTV of 90% or more will incur MIP throughout the life of the loan. Those made for less than 90% of the home's value will incur these extra monthly costs for 11 years. No longer does paying your loan down below the 78% threshold automatically save you from MIP charges. This can mean significant costs over the life of the loan for new FHA borrowers.
While this sounds like a major change, is it is, there are still a few things anyone considering purchasing San Diego real estate can do to shelter themselves from these charges including:
- Making a Down Payment Greater than 10% – FHA Loans allow you to bring as small as a 3.5% down payment to closing. By saving up and putting more than 10% down, you are only required to make mortgage insurance premium payments for 11 years instead of the life of your loan.
- Refinancing Your FHA Loan Once Eligible – As soon as you have sufficient equity in the home, refinance your FHA loan. This will eliminate your MIP payments, but pay attention to changes in interest rates. In the long run, paying the premiums may be a cheaper option if interest rates rise.
- Exploring Different Loan Options – There are still lenders out there offering creative loans to homebuyers with less than the standard 20% down. Many times though, FHA loans will still be the most affordable option.
Although June 3rd marks a significant change to the way in which mortgage insurance premiums are charged on Federal Housing Administration loans, they are still a valuable asset for many San Diego real estate buyers. While there are other lending options out there, FHA loans still remain some of the most commonly acquired by new homebuyers. Even with monthly MIP payments extending past their previous timeframe, FHA loans still offer many people the ability to purchase and afford a home that they otherwise would not be able to consider without saving much longer for a substantially bigger down payment.