President Obama announced last week a new policy that will reduce annual mortgage insurance premiums (MIP) on FHA loans. The National Association of REALTORS® estimates that a reduction in the annual MIP of .50 to .85 percent will enable many first-time borrowers and other borrowers who are typically undeserved by the lending community to obtain home loans and help them into the buying market (and out of renting!)
Ray Brousseau of Carrington Mortgage Services, which specializes in FHA loans for first-time borrowers and those with a FICO score below 640, offers the following tips for consumers who wish to buy a home with an FHA loan with this new lower MIP:
- Buying a house with an FHA loan is now more affordable in many cases, so check back with your preferred lender about how much home you may now qualify for with this reduction. 50 bps off the premium could amount to either meaningful savings on a monthly basisor an opportunity to purchase more home. Remember you will still have to demonstrate your qualifying income; FHA loans are government backed and require full documentation from borrowers.
- Always consider what you can comfortably afford. While you may be able to “buy more home” with this reduction—getting you more for your money—be aware of your monthly cash flow so you don’t bite off more than you can chew long term.
- Take action now. More people may now start to look for a home, which means competition could spike in your preferred area. When competition increases, home prices rise as well. This could also mean a rush of new loan applications for lenders, which could mean extended loan closing times (like what occurred in 2013 when the average loan closing time topped 50 days for an FHA home purchase loan).
- If you already own, consider refinancing. With mortgage rates at 20-month lows and a reduction in the premium, borrowers may be able to achieve monthly savings by refinancing. Borrowers with an FHA loan have a potential opportunity to reduce their monthly payment with a user friendly refinance option called an FHA Streamline loan, which is typically faster to close than a regular refinance because no appraisal is required, and there are no out-of-pocket costs.Cash-out refinancing may also be an option, but be responsible. This shift in the market will allow some individuals to take cash out of their loans to pay for things like college tuition, weddings, etc. but don’t take out more than you can afford to repay.
- Discuss the opportunity of a reduced term loan (25, 20, 15 or 10 year loan) with your lender. This could not only result in interest savings through the reduced term, but may also lower your rate and offer an opportunity to take advantage of the annual MIP savings.
- Don’t let anxiety about financing a home paralyze you. Certain lenders offer educational tools to help keep you knowledgeable and informed throughout the loan process.
For more information, visit http://www.carringtonhomeloans.com.