According to The Seattle Times, "lower credit scores lead to higher mortgage costs," a situation which often means borrowers must use FHA financing.
"Borrowers with minor credit dings, or down payments of less than 20 percent," says the paper, "still can't get access to federally backed loans once considered mainstream. Lenders are instead routing them into higher-cost Federal Housing Administration (FHA) mortgages, designed for low-income or bad-credit borrowers."
"The cost of such FHA loans has also jumped, with hiked upfront fees for private mortgage insurance and monthly insurance payments that now are locked in for the entire loan period -- regardless of the borrower's payment record or escalating home equity."
FHA loans remain wildly popular despite the best efforts of some in Congress and the lending industry to shut them down or at least make FHA loans less attractive. For instance, HUD was set to introduce the Homeowners Armed with Knowledge program (HAWK) in 2015, a program which would have cut borrower costs by almost $10,000 over the projected life of the loan. But—if you search around—you will see that there is no HAWK program today.
How come? In the budget bill passed at the end of 2014, Congress declared that "none of the funds made available by this Act nor any receipts or amounts collected under any Federal Housing Administration program may be used to implement the Homeowners Armed with Knowledge (HAWK) program."
So, on one hand, we have complaints that the FHA program is too costly but then, on the other, when HUD tried to lower FHA costs such efforts were stymied in Congress.
What about those "hiked upfront fees for private mortgage insurance and monthly insurance payments that now are locked in for the entire loan period?"
FHA MIP Fees
With the FHA there's an up-front mortgage insurance premium (the up-front MIP or UFMIP) which is currently equal to 1.75 percent of the mortgage amount. This rate was last "hiked" in March 2012.
But is that the whole MIP story? This is 2015. Is there any later MIP news to report?
There are two forms of FHA insurance—the up-front MIP with that 2012 increase and an annual mortgage insurance premium (annual MIP). As it happens, the annual MIP was lowered this year.
For most new FHA borrowers the annual MIP will go from 1.35 percent before the January announcement to .85 percent. The National Association of Realtors estimates that "a reduction in the annual MIP of 0.50 to 0.85 percent from the current 1.35 percent would price-in an additional 1.6 million to 2.1 million renters along with many trade-up buyers, resulting in 90,000 to 140,000 additional annual home purchases."
Okay, what about locking-in annual MIP premiums for the life of the loan. Surely that's not good for borrowers.
For a very long time both FHA and private mortgage insurance (MI) premiums lasted the life of the mortgage, even when the principal balance declined and equity in the property exceeded 20 percent. HUD changed the policy for FHA loans in 2001 with a new standard which said that borrowers could cancel the annual MIP once the loan balance was reduced to 78 percent of the original amount but only if the loan had been outstanding at least five years. (Private mortgage insurers also adopted similar policies.)
Next, in 2013, HUD went back to the pre-2001 system. Now the annual MIP remains in place for the life of the loan.
So, is the new system an extra burden on borrowers now that annual MIP costs are locked-in for the life of the loan?
If you have a $250,000 mortgage at 4 percent fixed that you take out in July 2015 and make regular payments on, the loan balance will not be reduced to 78 percent of the original principal—$195,000—until October 2025.
That's ten years. However, according to Freddie Mac, the typical loan today is only outstanding 5.6 years. In other words, although the rules have been revised, FHA borrowers can expect to pay an annual MIP as long as the original loan is outstanding, a situation which in practical terms has not changed.