Earlier this week, HUD announced it would be implementing increases in the premiums they charge borrowers. This is a move that is being made to increase their financial standing. How does this affect home buyers? This clearly means the cost of borrowing is going up.
FHA loans are more liberal in their underwriting guidelines than most conventional loan products. HUD is not a lender. Rather, it is a federally-insured insurance company. They insure lenders against default on loans underwritten in compliance with their published guidelines. It is because of this insurance that lenders approve and close loans with more liberal guidelines.
As an insurance company, HUD charges two types of premiums on the FHA mortgages:
- The UFMIP (Up Front Mortgage Insurance Premium) will be raised effective April 1, 2012 from its current 1% to 1.75%. One advantage to the UFMIP is the fact that it is typically built into the loan amount and does not require additional cash outlay at closing. However, the increase in loan amount does impact monthly payment and cash flow.
- The MMIP (Monthly Mortgage Insurance Premium) will be raised 10 basis points on April 1, 2012 to cover the requirements of the payroll tax extension approved last year. This is a direct increase of 10 basis points in the borrower’s mortgage payment, and has the effect of a 10 basis point increase in interest rates. As a kicker, loans over $625,000 will be bumped 35 basis points from today’s levels effective June 1, 2012. This bump is substantial. Check out the numbers on this chart.
To break it down, on a loan amount of $300,000, there is an increased payment of $36.41, which doesn’t sound too bad. However, we know that home buyers buy homes comparing what their monthly payment will be after they close. This hike in payment is equivalent to borrowing an additional $7,000. Starting next month, it’s as if the home became $7,000 more expensive. What is the result? Buyers are going to have to pay more OR they’re going to have to offer less to the seller (to maintain the same mortgage payment they were comfortable with today). A $7,000 lower offer is like another 2.5% decline of home prices.
If you’re a seller with a home on the market, what is the best way to handle this increase? Price correctly and get into contract in March! For buyers, today is the cheapest mortgage you are likely to see ever again! Make your move!
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