FHA Loans and Mortgage Insurance Premium – More Expensive than Expected

 

FHA and PMI

 

 

 

 

Federal Housing Administration (FHA) loans can be confusing because the FHA does not make loans.  It insures the loans made by lenders it has approved.  So, if a lender defaults, the FHA covers the losses – not the lender.

 

One of the great benefits of an FHA insured loan is that it only requires a 3.5% down payment, making homeownership much more feasible for those potential buyers purchasing Fairfax VA Real Estate, who do not have the traditional 10%-20% down that conventional mortgages require.

 

The downside to this is that homebuyers, who do not put down at least 20% on their home purchase, are required to purchase Private Mortgage Insurance (PMI or MIP).

 

In exchange for PMI payments, the FHA guarantees to lenders that if the lender forecloses, then the FHA will purchase the home for the full value of the mortgage loan.  The FHA requires PMI payments for as long as the homeowner has less than 20% equity in the home.  Since most FHA borrowers only pay the minimum 3.5% down, most pay PMI.

 

Beginning on April 1st, 2013, PMI will be going up by .1% to 1.35% which is not really a noticeable increase.  The painful increase comes on 6-3-2013 when FHA’s policy on the duration of PMI changes.  Instead of requiring PMI until 20% equity is achieved, the new policy will require PMI for the duration of the loan – effectively doubling the total amount of PMI that would be paid over the life of the loan.

 

Here is an example:

2-12 example

 

 

 

 

 

 

For those who stay in their homes for less than 10 years, and those than will be able to refinance into a conventional mortgage down the road, this is not a problem.  For those who intend to stay in an FHA insured loan, this is a significant increase.

The best thing to do for those who are considering an FHA loan is to secure that loan before the policy changes on June 3rd, 2013.  There are wonderful Fairfax VA homes for sale, and enough time to secure an FHA insured loan before the June 3rd policy change.

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