The news from President Obama, and then HUD, regarding cutting the FHA mortgage insurance premiums was the focus recently of JMAC’s brokers and mortgage investors. But will it really have an impact?
According to most analysts’ estimates, cutting FHA premiums could save homeowners and potential buyers thousands of dollars. FHA premiums for borrowers with a down payment of 3.5 to 5 percent will be lowered to 0.85 percent from 1.35 percent. For borrowers putting down 5 percent or more, premiums will fall to 0.8 percent from 1.30 percent.
This means, if a borrower qualifies for the U.S. national median home value of $175,000 and puts down 3.5 percent - after 30 years the borrower could save more than $14,700. A borrower putting 5 percent down on a $175,000 loan would save more than $14,300. The slash in premiums should help more than 800,000 current homeowners through refinancing and attract up to 250,000 new buyers in the first year.
As JMAC’s brokers know, however, all is not rainbows and unicorns. The FHA is required to keep a reserve fund with a capital ratio of 2 percent, as a buffer for potential future losses but currently, the ratio is at 0.41 percent. Critics, such as private mortgage insurance companies, are quick to remind the industry and politicians about this
Apart from lowering FHA premiums, the Obama administration is pushing for extended support for affordable rental housing. Although the housing industry has seen a decline in first-time home buyers, buying a home today is more affordable than it was twenty years ago. An average buyer would only spend 15 percent of their income on a mortgage today, compared to 22 percent in the past. On the other hand, rent prices have grown more than 50 percent since 2000, with income growth lagging behind. Therefore, renters today should expect to pay about 30 percent of their income on rent, compared to 25 percent historically. JMAC’s clients know that the steep rental prices have created a barrier for young adults to purchase a home due to the inability to save for a down payment and lowering FHA premiums may not resolve this issue.