Big changes may be coming to FHA loans this year that may make FHA loans a far less attractive option for today’s buyers. Following a comment period, it’s expected that the following proposals will be enacted (read more here).
Changes to Mortgage Insurance Premiums
The annual mortgage insurance premium (MIP) for most new mortgages will increase by 0.10%, and premiums on jumbo mortgages ($625,500 or larger) will jump 0.05%, to the maximum authorized annual mortgage insurance premium. Perhaps more importantly, FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan. For years FHA cancelled MIP on loans that reached 22% equity (whether through pay downs of the loan or through market appreciation), but that will now change. MIP, which can easily add hundreds of dollars per month to a typical mortgage in our area, will continue throughout the life of the loan going forward.
Requiring Manual Underwriting on Loans with Credit Scores below 620 & Debt-to-Income Ratios over 43 Percent
If you have a score below 620 and a total debt-to-income (DTI) ratio greater than 43%, your loan must be manually underwritten and the lender must document compensating factors that would support an approval.
Raising Down Payment on Loans above $625,500
Perhaps the most significant change is that loans above $625,500 will now require a minimum down payment of 5% rather than the 3.5% required for loans below that limit (the FHA limit in our area is $729,750). With the return of 5% down conventional loans, it likely isn’t going to make sense for borrowers in our area to use FHA if they are borrowing above $625,500 because there will no longer be a down payment advantage, and the MIP (as noted above) will be higher and permanent.
With these big changes coming to FHA loans, it makes sense to ask your lender a lot of questions and to understand the loan product you’ll be getting!