Planning on buying a home soon, and getting an FHA loan, so you only have to put 3.5% down? Pay attention, because there are new FHA changes going into effect soon that will make that purchase much more expensive. It will be important for anyone considering getting an FHA loan to move quickly so they avoid one or both of the increases.
The first change, taking effect on April 1, 2013, is the increase in the mortgage insurance premium (MIP) for most new mortgages by 10 basis points. That means that the government’s annual cost to the buyer for obtaining the loan will rise from 1.25% to 1.35%. Doesn’t seem like much? Think about that increase over the life of a loan. It could be a substantial amount of money over time.
The second change starts on June 3, 2013 and it will no longer allow you to cancel the MIP. Currently, once your loan-to-value ratio hits 78% you can stop paying the MIP. The government figures that you’ve got enough money invested that you aren’t as high of a risk for foreclosure. Under the new change you’ll have to carry the MIP for the life of the loan. Essentially this is a monthly charge for having the loan. It doesn’t help you pay down your principal or loan amount in anyway, so it makes the FHA loan more expensive.
Why all the increases? They are a way for the FHA to begin rebuilding its reserve funds after experiencing large losses over the last decade due to foreclosures. Most importantly for buyers though is to know that these changes make an FHA loan a fairly expensive option compared to a conventional loan. It is important when shopping for a lender, or speaking to the lender you’ve chosen, to understand the difference in payments and overall cost of the loan. Or you can make sure to act quickly and buy your home prior to the changes taking place.