Monthly Archives: July 2013

How To Cancel Your FHA Mortgage Insurance Premiums (MIP)

As compared to conforming loans and jumbo mortgages, Federal Housing Administration (FHA)-backed loans are popular for several reasons.

  1. FHA allows a 3.5% downpayment
  2. FHA allows refinances without appraisal
  3. FHA mortgage rates are usually really low

170883162Relative, though, one place where FHA mortgages can fall short is with respect to mortgage insurance.

As compared to loan types including conventional, USDA and military loans, FHA mortgage insurance premiums (MIP) are sometimes cumbersome and costly.

If you’re going to use an FHA-backed mortgage for your upcoming purchase or refinance, you’ll want to know how FHA MIP works.

FHA Mortgage Insurance Gets Doubled Up

The Federal Housing Administration’s role in mortgages is different from the role of Fannie Mae and Freddie Mac. The FHA doesn’t “buy mortgages” from banks like Fannie and Freddie do to create market liquidity. Rather, the agency is an insurer of mortgages.

It works like this : The Federal Housing Administration publishes official mortgage guidelines to which banks can choose to underwrite a mortgage. Mortgages which meet these published guidelines are most commonly called “FHA mortgages”.

For a bank which underwrites an FHA mortgage, should the loan ever go into default, the agency’s function is to repay the bank’s loss, much like a auto insurer would pay a consumer for a loss due to accident.

The Federal Housing Administration pays its claims from a fund called the Mutual Mortgage Insurance (MMI) fund. The fund is funded using two types of mortgage insurance which is paid by the nation’s FHA-insured homeowners.

The two types of FHA MIP are the Upfront Mortgage Insurance Premium (UFMIP) and the annual Mortgage Insurance Premium (MIP). All FHA-insured homeowners pay at least one form of FHA mortgage insurance.

Beginning June 3, 2013, however, because of new FHA guidelines, all new FHA loans will require both forms of MIP, and a large group of FHA-backed homeowners will lose the chance to remove mortgage insurance prior to their loan being paid-in-full.

How Much Are FHA Mortgage Insurance Premiums?

The FHA’s mortgage insurance requirements vary by loan type and loan length.

FHA Upfront Mortgage Insurance Premiums

The FHA’s current upfront mortgage insurance premium (UFMIP) is 1.75 percent of your loan size. For example, if you want to apply for an FHA purchase mortgage and your loan size is $300,000, then your Upfront MIP will be equal to $5,250.

Upfront MIP is not paid as cash. It’s automatically added to your loan balance by the Federal Housing Administration. Therefore, your final loan size in the example above will be grown to $305,250. Furthermore, upfront MIP is not used in your loan-to-value calculation.

You can make a 3.5% downpayment on your purchase, add the UFMIP to your loan size, and still meet the FHA’s minimum downpayment guidelines.

Upfront MIP is paid at closing and paid into the Federal Housing Administration’s Mutual Mortgage Insurance fund. It’s never paid again. This is why it’s called “upfront” MIP. FHA homeowners pay mortgage interest on the upfront MIP for loan’s full term.

FHA Annual Mortgage Insurance Premiums

The Federal Housing Administration’s other type of mortgage insurance is the annual Mortgage Insurance Premiums (MIP). It’s paid in 12 installments annually and included in your monthly mortgage payment.

On a monthly mortgage statement, the annual MIP payment is often shown as “HUD Escrow”, “Risk-Based HUD”, or “Monthly Mortgage Insurance”.

Annual MIP is required on all FHA mortgages. Premiums vary according to your loan traits.

Until April 1, 2013, the MIP schedule for new FHA loans is as follows :

  • 15-year loan terms with loan-to-value over 90% : 0.60 percent annual MIP
  • 15-year loan terms with loan-t0-value under 90% : 0.35 percent annual MIP
  • 30-year loan terms with loan-to-value over 95% : 1.25 percent annual MIP
  • 30-year loan terms with loan-to-value under 95% : 1.20 percent annual MIP

There is also a 0.25 percentage point premium for loans which exceed $625,500. Loans of this size are only available in high-cost areas in which the median home price is elevated as compared to national norms.

Such areas include Loudoun County, Virginia; Orange County, California; and Bethesda and Potomac, Maryland. In these locales, Federal Housing Administration-backed loans may be for as much as $729,750. The annual MIP is 1.50 percent.

For now, 15-year FHA mortgages with a loan-to-value of 78% or less are exempt from annual MIP payments. This will change with the second phase of the new FHA mortgage insurance guidelines which go into effect June 3, 2013.

How To Get Rid Of Your FHA Mortgage Insurance

FHA mortgage insurance is not permanent. Eventually, FHA mortgage insurance can go away. The schedule for getting rid of MIP changes by loan term.

For FHA loans endorsed prior to June 3, 2013, the MIP cancelation terms are as follows :

  • 30-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value and annual MIP has been paid for at least 60 months.
  • 15-year loan term : Annual MIP is automatically canceled once the loan reaches 78% loan-to-value. There is no requirement for MIP to be paid for at least 60 months.

Note that the loan-to-value calculation is not based on the current appraised value of the home; it’s based on the FHA’s last known value of the home. In many situations, the last known value is the home’s purchase price.

Using these rules, homeowners with a 30-year fixed rate FHA mortgage must pay mortgage insurance for at least five years before it can go away. Homeowners with a 15-year fixed-rate FHA mortgage can have MIP removed as soon as LTV drops to 78%.

At today’s mortgage rates, a 30-year FHA mortgage on which the minimum 3.5 percent downpayment was made would reach 78% LTV in roughly 10 years. A 15-year fixed would require 26 months.

Again, beginning June 3, 2013, the FHA MIP rules change. Some newer FHA loans will pay annual MIP for the full 30 years.

Compare FHA Mortgage Rates And MIP

FHA mortgage rates are cheap right now; cheaper than conventional loans and cheaper than VA home loan options.

Be sure to understand FHA mortgage insurance premiums, though. Over the long-term, MIP can be costly so it pays to compare home loan options — especially if you’re waiting until after the agency’s MIP changes to lock a mortgage rate.

Starting April 1, 2013, the FHA’s mortgage insurance rules will change. For homeowners trying to cancel MIP or otherwise refinance, after April 1, the stakes are raised. Get moving today, therefore.

Improve Your Mortgage Approval : The Income-Equity-Credit Triangle

Mortgage lending is tough these days. Banks are more careful, borrowers are more careful, and there is more federal regulation than there’s been in several years. However, there’s no “trick” to getting approved for mortgage. Underwriting is the same as it ever was — just with higher hurdles. All you have to do to get approved is to satisfy the Mortgage Income-Equity-Credit Triangle.

Get Mortgage Approved : Income, Equity, Credit

170883153To get approved for any type of mortgage — conforming, FHA, jumbo, VA or otherwise — you’ll need to show income, equity and credit. It’s that simple, really.

Income, Equity and Credit are mortgage lending’s Big 3.

  • Income : Your monthly taxable income versus your monthly household debt (i.e. DTI).
  • Equity : The percentage of equity you have in your home (i.e. LTV).
  • Credit : The middle of your three scores, as reported by Experian, Equifax, and TransUnion.

For each mortgage product available, mortgage applicants must meet some minimum series of qualifications. When all 3 factors are in balance, the approval “bullseye” is in plain view, and a mortgage approval is likely.

Hit The Bullseye : Get Approved For Your Loan

The ideal mortgage applicant for a bank will have strong income, big equity, and great credit. In reality, though, not every applicant will. And, that’s okay. It’s because of something known as “compensating factors”.

Compensating factors are strengths in a person’s mortgage application that, literally, compensate for weakness in the same. For example, if a person’s income levels are low but he has stellar credit and loads of equity, it’s likely he’ll be approved in underwriting. The Income-Equity-Triangle is shorter at its top because of low income, but wider at its base because of credit and equity.  It’s the compensating factors (i.e. credit and equity) that keep the “bullseye” in view, resulting in approval.

When You Don’t Have Compensating Factors

Compensating factors are limited to income, credit and equity; you can’t use them for “employment history”, for example. For this reason, few applicants have legitimate compensating factors. Without compensating factors, mortgage approvals are tougher to get.

For example, if we look at the same applicant from above — low income but without stellar credit andwithout big amounts of equity — the mortgage application gets a turndown.

The base of that Income-Equity-Credit Triangle can’t widen, so the bullseye breaks the plane of the triangle.

This creates a “turndown”.

Need A Mortgage Approval ASAP? Get One Now.

The problem with compensating factors is that they’re unofficial; they’re a bit of common sense injected into an otherwise sterile mortgage lending process. If you think your mortgage should be approved despite failing the official, published mortgage guidelines, consider applying anyway. Compensating factors could get you approved.

Bi-Weekly Mortgage Payments : Will You Pay Your Mortgage Faster?

Thinking of starting a bi-weekly mortgage payment plan? You may want to think again. A bi-weekly plan may sound terrific, but it’s a program not without its risks. There may be better, less expensive ways to own your home faster.

Typical Mortgage : 12 Payments Per Year

The typical mortgage asks for one payment per month, which equals 12 payments per year. With a 30-year fixed rate mortgage, therefore, 360 payments are required to pay the loan in full.

170883126Each mortgage payment is split into two parts — a principal portion and an interest portion. The principal portion is applied to the amount that you owe the bank. This diminishes your remaining loan balance. The interest portion is your cost for borrowing from the bank.

As your loan moves toward maturity, the balance between your mortgage payments’ principal-and-interest shifts. In the early years, a significant portion of your payment is comprised of interest and just a small part goes to paying down your balance. It’s not until later in your loan’s lifecycle does the principal portion of the payment start to grow.

This repayment schedule is the reason why after 5 years or so, your loan’s balance has been barely paid down. The technical term for this repayment schedule is amortization (ah-mor-ti-ZHAY-shun).

Bi-Weekly Mortgage Payments : 13 Payments Per Year

A bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year.

Except that you can’t make 13 payments per year on your mortgage — that’s not how a mortgage works.

With a mortgage, you pay a certain amount of interest on an annual basis and that amount is covered in your first twelve payments. The 13th payment has to go somewhere, though, so it gets applied to your principal balance; the amount that you still owe to the bank.

And, this is how a bi-weekly payment plan works. With each “13th payment”, your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner.

At today’s mortgage rates, bi-weekly payments shorten your loan term by 4 years.

Effective Alternatives To Bi-Weekly Payments

Bi-weekly payments plans work; there’s no doubt about that. It’s just basic math. However, there are several reasons why homeowners may want to avoid enrolling in a bi-weekly mortgage payment plan.

The first — and most obvious — reason to avoid bi-weekly mortgage payment programs is that homeowners choosing to self-manage their bi-weekly payments get better results than via a bank-managed bi-weekly payment program.

Here’s how to self-manage : Rather than sending payments to the bank every other week, achieve the same result by making your regular mortgage payment once monthly, an adding 1/12 of your regular mortgage payment to your check.

For every $1,200 in your mortgage payment, in other words, add $100 to your monthly payment. By sending $1,300 to your lender monthly, you will “overpay” your mortgage by $1,200 annually, which is a 13th payment.

Assuming a $300,000 mortgage at 4.000%, look at how the math works :

  • Bank-managed bi-weekly mortgage payments pays off in 26 years, 0 months
  • Self-managed bi-weekly mortgage payments pays off in 25 years, 11 months

This math works because banks don’t apply that 13th payment until the year is complete. By contrast, your self-managed system applies 12 times per year.

Another reason to skip the bi-weekly mortgage program is that bi-weekly payments are a contract and once that contracts starts, as a homeowner, you’re obligated to make those 13 payments per year no matter what.

By contrast, with a self-managed payment plan, you never have that obligation. You can choose to skip a month during the holidays, for example, then double-up on payments later on, or not at all. It’s all in your control — not the bank’s.

And, lastly, if you find your bank is charging for it bi-weekly mortgage payment program, make sure to say “no” no matter what. That’s just wasted money.

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Putting bi-weekly mathematics aside, the thing is, with mortgage rates low, your best alternative to the bi-weekly mortgage plan may be to get a new mortgage altogether.

Extra payments can speed up your payoff, but not as well as taking a zero-closing cost refinance, then putting your monthly savings back to your loan balance. Your mortgage payment stays the same, but your loan payoff date shrinks.

Assuming a 1 percent drop in your mortgage rate, the Refinance-and-Reinvest plan can shorten your loan’s term 63% more than via a bi-weekly mortgage payment program.

And with lower interest rates, of course, comes larger long-term savings.

How Much Home Can I Afford?

Among the most common questions from a home buyer is “How much home can I afford?” The answer, however, like many things, is that “it depends”. There are no concrete rules for how much home you can afford, or how big your mortgage should be. This is because the way that a mortgage lender calculates your maximum purchase price will be different from how you would calculate it yourself. Let’s look at both approaches to home affordability.

Using DTI To Determine Maximum Purchase Price

170882976When a mortgage lender calculates a home buyer’s maximum home purchase price, it doesn’t actually consider the purchase price of the home.

Rather, it looks at the buyer’s expected mortgage loan size and the current mortgage rates to determine the expected monthly mortgage payment, and then compares that figure to the buyer’s monthly income.

This comparison is known as the Debt-to-Income Ratio. Sometimes called DTI, the ratio has two components.

Debt-to-Income : Front-End Ratio

The first component of the debt-to-income ratio is the “front-end ratio”. Front-end ratio compares the expected monthly housing payment to a buyer’s monthly income, where “housing payment” includes all of the following obligations :

  • Monthly principal + interest payments
  • Monthly real estate taxes due
  • Monthly homeowners insurance due
  • Monthly dues due to an association

There is no maximum limit for a front-end ratio, but lenders prefer to see front-end DTI of 28% or less. In other words, no more than 28% of a buyer’s monthly income should be allocated to housing payments.

Debt-to-Income : Back-End Ratio

The second component of debt-to-income ratio is the “back-end ratio”. Back-end ratio compares not just the monthly housing payments against a buyer’s monthly income, but all monthly payments.

Back-end ratio accounts for all of the following monthly obligations a home buyer may have :

  • Monthly housing payment(s)
  • Monthly minimum credit card payments
  • Monthly child support or alimony
  • Monthly car payments for a car loan or lease
  • Monthly payments to an installment loan such as a timeshare

In general, banks want to see a back-end ratio of 36% or less, however, having a DTI over 36% will not automatically disqualify your mortgage application. Many lenders allow up to 45% debt-to-income.

Make A Monthly Household Budget

As a home buyer, you can rely on a bank to tell you how much home you can afford, or you can figure it out on your own. Most people will opt for the latter. This is because, in many cases, a bank will approve you for a bigger home loan that you may be otherwise comfortable paying against.

Using DTI as an example, when 45% of your gross monthly income is spent right off the top, it doesn’t leave much money for saving, investing or living, let alone paying taxes.

Therefore, another approach to the “How much home can I afford” question is to determine the maximum monthly payment you’d like to make towards housing, and then working that figure backwards to find a maximum mortgage loan size.

For example, if you budget for a monthly housing payment of $2,500, and the current 30-year fixed rate mortgage rate is 4%, assuming real estate taxes and homeowners insurance cost 2 percent annually as compared to the value of the home, you work the math backwards to find that your maximum purchase price for a payment of $2,500 is $385,000.

By setting your monthly maximum payment, you can make sure to stay in budget. If you leave it to the bank, you may stretch yourself too thing.

FHA’s solvency plan isn’t fair

The government insurer, which may or may not be in need of a bailout, plans to generate $10 billion by locking middle class borrowers into high fees for decades.

FORTUNE — This is what you call kicking ’em when they’re down.

168357020Consumers who don’t have a lot of cash to put down when buying a house usually have to pay a higher rate than typical borrowers for the first few years of their mortgage. Now, thanks to a change at a government program, they will have to pay that elevated rate for as long as 30 years. This is apparently how the Federal Housing Administration plans to shore up its finances.

Lenders generally require borrowers to take out mortgage insurance when they don’t put down 20% of a home’s purchase price or have 20% equity when refinancing their mortgage. The FHA is the nation’s largest insurer of low down payment home loans.

Starting next month, the FHA will begin requiring borrowers who take out their insurance to pay premiums as long as they have their mortgage. For the past decade, the FHA has allowed borrowers to cancel the policy when their loan balance drops to 78% of the value of their home, therefore eliminating the need for mortgage insurance.

The change is part of a broader plan to boost the finances of the FHA, which some say is deeply in the hole. Last month, the FHA raised its insurance premium. Now someone getting a loan with FHA mortgage insurance on average pays a 4.7% interest rate for a 30-year fixed rate loan, vs. 3.4% for borrowers putting down 20%.

But the biggest boost to FHA’s finances will come from making its insurance premium permanent. FHA officials recently estimated that change would have locked in $10 billion in additional fees for the FHA on mortgages it has insured in the past three years alone. That’s also the additional amount borrowers will have to pay over the life of their loans.

The problem is the FHA is going to be forcing borrowers to pay for the insurance long after they need it. Private mortgage insurers are required by law to cancel borrowers’ policies once they have hit the 20% home ownership threshold. But the FHA is specifically exempted from the law.

And it’s not even clear the FHA needs the money.

Recently, the Obama administration estimated in its budget that the FHA might need about $943 million in the next fiscal year to cover its expenses. That excludes any gains the agency may have from legal settlements, which have been significant recently. But almost all of that $943 million is for expected losses in the FHA’s reverse mortgage program, which is not affected by the extension of the premium payments.

With home prices rising again and the economy improving, the finances of the FHA’s traditional lending program have improved dramatically. They could continue to improve … if not for the fact that the FHA may now be stuck with the riskiest borrowers and all of the losses thanks to the premium hikes. Indeed, private mortgage insurance companies have already started advertising campaigns around the FHA’s recent increase in rates, saying borrowers can get a better deal elsewhere.

Nonetheless, some argue that the FHA should do whatever it can to improve its finances, even just to eliminate the perception that the agency needs a bailout.

“Rebuilding the FHA’s capital base is the fairest thing you can do for borrowers,” says Bill Apgar, a Harvard University professor and former FHA commissioner who was at the agency in 2001 when it began automatically canceling borrowers’ policies. He notes that despite problems, the FHA weathered the financial crisis better than its rivals. “Modeling FHA to what private insurers do might not be a relevant benchmark.”

But the FHA has more private competitors than it once had. Also, throughout most of the 1970s, 1980s and 1990s, borrowers who took out loans with FHA insurance could refinance into new loans after a few years, eliminating the insurance and lowering their monthly payments. With interest rates at historic lows it’s unlikely that option will be available to FHA borrowers today.

The biggest problem we have today in the housing market, and perhaps the economy in general, is that despite the drop in prices, first-time home buyers remain relatively rare. Making it even harder to get on to the entry ramp for the housing market won’t help the economy or the FHA’s finances.

USDA vs FHA Loan – Better Choice?

We are commonly asked by Orlando area home buyers which mortgage option is better – FHA or USDA? In short, USDA Rural Housing is the financially better choice for eligible home owners. Please note we used the word “eligible” in that last sentence because there are certain factors that determine if you household will be eligible for the USDA Rural loan.  These USDA eligibility requirements do not apply to FHA or Conventional loans.

Below we will discuss the basic differences and what home buyers need to know when looking at these different home loan options. 

  • 162284902USDA is the only loan in the Orlando suburb area that offers 100% financing for non military homebuyers.  The FHA loan will require a minimum 3.5% down payment.  But what if you are homeowner that wants to put money down on your home loan?  USDA will allow this, you are not required to financing 100% of your home loan.  +1 for USDA (100% financing)
  •  USDA and FHA both require a one-time up front funding fee (or guarantee fee) that is added to the borrowers loan amount. USDA is 2% of the loan amount, FHA is slightly less at 1.75% of the loan amount.  Slight advantage to FHA on this one.  However (and this is a big one)  they both also require monthly mortgage insurance costs that will be included in the homebuyers payment each month. Most people know this term as “PMI”  The biggest advantage to the USDA mortgage is that the monthly mortgage insurance is about 3 times LESS when compared to FHA.  So when comparing numbers on a basic $150,000 home, the USDA loan option is going to save the home owner over $100 per month. In addition to this, the USDA home buyer will NOT be required to put down any money (remember FHA requires 3.5% down payment)  +2 for USDA ( monthly MI and payment much less)
  • Eligibility requirements for USDA – The big thing is location –  USDA home loan are only available in rural defined locations around Orlando.  The immediate metro area of Orlando will NOT be eligible for the program.  Homebuyers looking to live in Orlando will be required to do a FHA, VA or Conventional loan.  However, many expanding suburb locations like Winter Garden, Deltona, Lake County, Kissimmee –St. Cloud are mostly eligible.  In addition to the locations – USDA has a cap on the household income.  This differs from county to county and household size, but the household income limits generally start at $74,750. It’s important to remember the household income caps apply to ALL household members that receive income, regardless if they are on the mortgage application or not.  +1 for FHA (no location or income requirements)
  • Time it takes to close –  USDA loans go through a two step approval process. First with the lender, second with the USDA.  As a result, the USDA loan will take around 2 weeks longer to close when compared to FHA loans.  +2 for FHA (faster closing time)
  • Closing Costs –  Both USDA and FHA permit the home seller to pay up to 6% of the buyers closing costs. This is great assuming the seller will do this during negotiations.  But what if the seller does not want to pay any concessions towards the buyers closing costs?  USDA will permit a second option so to speak.  The buyer will be permitted to roll their closing costs into the loan assuming the home appraises for higher than sale price. FHA will not permit this – if the sellers doesn’t pay your closing costs, you must pay them.  +3 for USDA (two options to help pay closing costs)

In a nut shell :

If you are homeowner looking to purchase a home in a outlying area of Orlando, and your household income is below the limit, defiantly take a look at the USDA loan. Both USDA and FHA have similar requirements in regards to qualifying and credit.  If you are currently pre approved for FHA loan, you will likely also be approved for USDA housing assuming your location and household income meet the eligibility requirements.