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FHA change requires mortgage insurance for the life of the loan

Local Realtors have mixed reactions, don’t expect big impact

Posted: May 5, 2013 2:00 a.m.
Updated: May 5, 2013 2:00 a.m.

A home for sale in Newhall. Home buyers using FHA-backed loans because of their attractive low down payments, will have to pay for mortgage insurance for the life of their loan.

Starting next month, home buyers who get FHA-backed loans will have to buy mortgage insurance throughout the life of their mortgage.

Effective June 3, when a home purchase is insured by the Federal Housing Administration – FHA – buyers will no longer be able to drop their mortgage insurance once the balance drops to 78 percent of the value of the home.

Announced in January, the change in policy comes as the agency attempts to build up its Mutual Mortgage Insurance Fund. The FHA is the nation’s largest insurer of low down payment home loans.

Locally, Santa Clarita Realtors have mixed reactions to the change coming just as the resale market is recovering.
With inventory sitting at record low numbers, the vast majority of buyers who need an FHA-backed loan, which allows lower down payments, can’t compete with conventional and cash buyers, said Alex Woltman, co-owner of Intero Real Estate Services of Santa Clarita.

“Their offers are simply not being accepted so I do not believe that at this time it will make much of a difference,” Woltman said.

It’s definitely a drawback, said Pam Ingram with RE/MAX, but there are other options for buyers.

“Right now the market is so hot, and with interest rates low, that I don’t think it will slow those buyers at all,” Ingram said.”

Kathy Salisbury and Erika Kauzlarich-Bird with Triple D Realty agree.

While many buyers need FHA financing because of the low down payment options, both Realtors said buyers will still have other options once they get into a home and gain some equity.

Once buyers get their foot in the door through FHA, they can refinance using a conventional loan later, and get out from under the new FHA required mortgage insurance rule, Salisbury said.

Credit requirements are much more stringent with conventional loans, but, so many home buyers still need the FHA loans, said Connor MacIvor with RE/MAX.

“Currently, over 70 percent of our buyers are FHA,” MacIvor said. “They have been made aware (of the change) and their typical response is an unhappy “it is what it is.”

Although the FHA’s actions are only creating another hurdle for home buyers who are already competing against multiple offers to find their dream home, or first home, the new rule should not change anything, said Sam Heller with Keller Williams VIP.

“I never had a buyer back out because they did not want to pay the mortgage insurance,” Heller said. “It was their only hope for ever purchasing a home with a low down payment.”

But, Dwight Hawkins, with Realty Executives said the upfront loan fee home buyers pay for an FHA-back loan is jumping as well from 0.1 to 1.35 percent.

After adding up all the fees to buy, and own, a home – loan fees, mortgage insurance, impound account, closing costs, principle, interest, taxes, insurance and, in most cases, a homeowners association fee – the home buyer has a lot of costs added on when buying a home, said Dwight Hawkins, with Realty Executives.

“I believe the administration has said that they want more people to buy homes and are looking to ease up on qualifications again,” Hawkins said. “Go figure!”

Paul Gonzales with Troop Realty has a different outlook. Buyers look at FHA loans becasue they only require a down payment of 3 percent, he said.

But there are conventional mortgage lenders who can offer loans with down payments as low as 5 percent, he said. And some lenders don’t even require mortgage insurance.

“People use what is available to them under specific circumstances. It is an ever moving ball,” Gonzales said. “Just keep on top of it and informed. That is the key to the successful close of escrow for any buyer in today’s market.”




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