The FHA is working on a new program that could substantially reduce mortgage costs for first-time home buyers, a program so big it could push home prices higher nationwide.
First-time home buyers now represent about 30 percent of all existing home purchasers according to the National Association of Realtors. That's a big number but historically first-time buyers have included about 40 percent of the existing home market.
The missing 10 percent is important not only because more first-timers are a major key to marketplace mobility. When a first-timer buys a home ,the owner can move up to a bigger house or a home in another market -- in other words the seller can become a repeat buyer with equity from the sale. However, property owners can get stuck if there are insufficient first-time buyers in the marketplace willing to make bids.
The result is that some 1,500 down-payment assistance programs exist, many designed to help first-time buyers.
Now HUD is proposing a new FHA mortgage program for first-time buyers called the Homeowners Armed With Knowledge program or HAWK. Borrowers who qualify for HAWK will cut their mortgage costs substantially under the program.
How does it work? Let's look at some questions and answers:
How much will first-time FHA mortgage borrowers save?
HUD estimates that the typical FHA borrower will save $325 a year. That's $3,250 if the loan is outstanding for 10 years.
Do the savings come in the form of lower mortgage rates?
No. FHA mortgages are loans backed with government insurance so buyers can purchase with as little as 3.5 percent down. The HUD plan will cut insurance costs, especially at closing. However, whether insurance costs or mortgage rates are reduced the impact is the same -- borrowers save real money.
How does the FHA HAWK program work?
There are several steps under the HAWK program.
First, the up-front FHA mortgage insurance premium -- now equal to 1.75 percent of the loan amount -- will be reduced to 1.25 percent. For a $150,000 mortgage that's a savings of $750 at closing. To get this benefit the borrower must attend pre-closing housing counseling sessions.
Second, the FHA annual mortgage insurance premium -- 1.35 percent of the loan amount for most FHA borrowers -- will be reduced to 1.25 percent. For someone with a $150,000 mortgage that's an additional savings of roughly $150 during the first year of the loan term.
Third, borrowers who pay their loans in full and on time for two years and who take additional housing counseling will see their annual mortgage insurance premiums drop in most cases to 1.10 percent. For the borrower with a $150,000 an FHA mortgage that's a savings approaching $225 per year.
How much pre-settlement counseling do FHA HAWK borrowers have to take?
HUD will require borrowers to attend six hours of counseling and education, including 1.5 hours of individual counseling. For our borrower with the $150,000 FHA mortgage who saves $750 at closing and $150 during the first year of the loan term that works out to about $150 per hour in lower costs, an extremely good investment.
What about the post-settlement counseling for FHA mortgages?
There's a one-hour counseling requirement, again a very good deal.
Is there a cost for counseling and education sessions?
HUD says that counseling and education fees can total $300 for the pre-closing sessions and $100 for the post-settlement training, however borrowers should shop around. It's possible that community housing groups, lenders and real estate brokers may sponsor the classes for less to encourage homeownership.
For more information speak with lenders. HUD is asking for comments until July 14th so the program will likely start in early Fall.