A leg up for the low-income homebuyer hangs in the balance. One of the first actions taken by the Trump administration early this year was to put the Housing and Urban Development’s proposed FHA’s annual insurance premium cuts on hold, introduced under President Obama’s term. As the year comes to a close, low-income buyers and their lenders are still asking HUD Secretary Ben Carson: Are we going to get a break?
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What are the potential FHA premium cuts? 4 facts to remember
Recently, President Trump nominated Brian Montgomery as the new FHA Commissioner. He returns to his former position under President George W. Bush. At the top of his “return to office” to-do list, Montgomery is expected to decide whether FHA premiums will be cut. Before President Obama’s term ended and President Trump was elected, cuts to the annual FHA insurance premium were proposed by the HUD — lowering insurance rates by 25 basis points.
Currently, the anticipated cuts are still on hold. If you fall among low- to mid-income buyers, the group that will benefit most, here’s what could happen if the cuts pass:
- Low-income buyers may find it easier to buy a house. The FHA is a government agency responsible for insuring mortgages and collecting borrowers’ fees used to pay back lenders in instances of home loan default. FHA loans are primarily designed to help first-time and low- to moderate-income buyers, including buyers with low to fair credit scores. Roughly 16 percent of new mortgages are backed by the FHA. Cutting annual premiums on FHA-backed loans can make total loan costs more feasible. This widens the scope of who can afford to buy.
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Monthly mortgage insurance may reduce. With FHA annual premium cuts on hold, the same home loan insurance fee — an annual 0.85 percent upfront premium — must still be paid by the borrower. This annual premium has not changed since January 2015. If the premium cuts go through, the premium rate will drop to 0.60 percent. This reduction could save FHA borrowers an estimated $860 a year, reflected in lower monthly payments.
- Buyers in pricier housing markets may see bigger benefits. The proposed premium cut affects the annual FHA mortgage insurance rate, based on a percentage. So, lower income buyers who may be purchasing in more expensive housing markets — like Boston, Washington D.C., or Manhattan — could reap more from the nationwide cut of 0.25 percent. As a result, some borrowers could buy a house in areas they were previously priced out of.
- Mortgage lenders could provide more options to first-time buyers. Remember, it’s most often first-time buyers and low- to moderate-income buyers who take out FHA loans to buy a house. While most mortgage lenders are more than willing to work with borrowers at any income level — even providing pointers to help rebuild a credit score, if necessary — making cuts to FHA insurance could help lenders make more loan options available. After the initial cut suspension was announced in January 2017, FHA loan applications dropped by 13 percent. Lenders are always on the lookout for additional loan products and cuts that could help borrowers who may have had limited buying power in the past.
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What to do while you wait: 4 more ways to reduce your mortgage
Homebuyers don’t have answers on the FHA premium cuts yet, but the house hunt continues. Until a decision is made as to whether President Trump’s suspension will be lifted, comparing and assessing mortgage features remains one of the most effective ways to keep your monthly payment affordable.
Therefore, when comparing mortgages, look at:
- Total upfront cost. Knowing how much you’ll need to pay for your mortgage upfront is a must. Far before you ever decide on a loan. A mortgage comparison calculator can crunch the numbers, factoring in all the extras including points, to help you choose between two different loans — or two different lenders.
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Mortgage insurance. The mortgage insurance add-on lowers the risk to your lender, making it easier for you to prequalify. This Consumer Financial Protection Bureau guide breaks down what type of mortgage insurance premiums and requirements may come attached to each loan type. As mentioned above, FHA premium cuts have the potential to reduce this added cost attached to FHA-backed mortgages.
- Term of the loan. The loan term is the repayment period based on a number of years. A longer loan term can lower your monthly payment but may have higher total interest costs. Furthermore, a shorter loan term may have a higher monthly payment with less interest because of a quicker payoff. You can compare 10, 15, 30, 40, and 50-year mortgage terms here.
- Interest rate. Mortgage interest rates fluctuate, making accurately evaluating and comparing more important than ever. You can find out what mortgage interest rate you’re eligible for using our LoanFly app in under 15 minutes.*
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The biggest question low to mid-income buyers are asking of the HUD is “When?” followed by, “What’s next?” If the FHA insurance premium cuts don’t pass, housing market insiders predict that demand for cheaper homes will increase. Housing budgets of first-time and lower-income buyers will remain limited. In some areas, sellers might drop their prices as a result. A seller may not be able to list a house above its appraised price to avoid alienating FHA buyers.
Wondering how much house you can afford? The first step is to get prequalified. Download our free app, plug in your information from the comfort of your own home, and get a skilled loan officer’s help.
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For educational purposes only. Please contact your qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.