The FHA is piloting its Homeowners Armed With Knowledge
(HAWK) program beginning Oct. 1,
in which first-time borrowers who participate
in housing counseling approved by the Department of Housing and Urban Development
before they make an offer on a home, as well as before and after settlement,
can get a reduction in their mortgage insurance premiums.
First-time home buyers who participate in the four-year
pilot program will benefit at closing from a 50 basis points reduction in the
upfront mortgage insurance premium and a 10 basis points reduction in the
annual premium. If buyers complete
post-closing housing counseling and do not have delinquencies greater than 90
days in the first 18 months after closing, they will receive an additional 15
basis points reduction on the annual premium starting the loan’s 25th month which lasts the life of their loan. .
The FHA loan is popular among today's U.S. home buyers.
Along with ultra-low FHA mortgage rates which rival those
from Fannie Mae and Freddie Mac, FHA loans are attractive because they offer a
minimum down payment requirement of just 3.5 percent -- the lowest of all
widely-available loan programs.
And now, a new Federal Housing Administration program -- the
Homeowners Armed with Knowledge program -- is expected to add to the program's
allure.
ABOUT THE FHA AND HOMEOWNERSHIP
The Federal Housing Administration (FHA) is the world's largest
mortgage insurer. It was first formed 80 years ago as an act of Congress; part
of the National Housing Act of 1934.
In 1934, it was difficult for home buyers to borrow money
from a bank. Because the economy was still reeling from the Great Depression,
banks typically enforced home downpayments of fifty percent or more on loans;
and required complete loan repayment in 5 years or fewer.
Terms like these precluded homeownership for many would be
buyers and, not surprisingly, more than 60% of Americans were renters.
Then came the FHA and its flagship mortgage insurance
program, which has helped make homeownership possible for more than 34 million
Americans since its inception.
The premise of the FHA's mortgage insurance program was
simple. Much like an auto insurer insured policyholders against loss from
damage or accident, the FHA agreed to insure lenders against loss from lack of
payment (which is known as "default" in mortgage terminology).
To get its insurance, the FHA published standard eligibility
requirements which all loans were required to meet. Today, those requirements
include a minimum credit score reading of 580; proof of citizenship or legal
residency; and a 3.5% downpayment.
The FHA program was revolutionary for the U.S. housing
market. Neighborhoods stabilized as loan defaults dropped and homeownership
rates crossed 60 percent by the early 1960s.
Today, FHA loans account for approximately 1 out of every 5
new loans.
2014 FHA MORTGAGE INSURANCE PREMIUMS
When an FHA loan goes bad, the agency repays lenders from
its Mutual Mortgage Insurance (MMI) fund. The Mutual Mortgage Insurance fund is
the account into which FHA mortgage insurance premiums (MIP) are paid each
month.
By law, the account is required to maintain a balance equal
to 2% of the FHA's outstanding insured loans and for the agency's first 60-plus
years, it met this requirement ably.
A rash of defaults between 2009-2012, though, dropped the
FHA's insurance reserves into negative territory.
To recoup lost money -- and to meets its federally-mandated
2% reserve requirement -- the FHA was forced to raise its mortgage insurance premiums
five times in 5 years.
Today, the FHA charges mortgage insurance in two parts.
The first MIP is charged at closing and it's called the FHA
Upfront Mortgage Insurance Premium, which some lenders abbreviate as UFMIP. The
second MIP is charged on-going as part of your monthly mortgage payment.
This payment is called the Annual Mortgage Insurance
Premium.
FHA MIP varies based on your downpayment and the length of
your loan. All FHA purchase loans are subject to an upfront MIP payment of
1.75%, or $1,750 for every $100,000 borrowed.
For annual MIP, the 2014 FHA MIP schedule is as follows:
- 30-year loans with a downpayment of 5% or more: 1.30%
annually
- 30-year loans with a downpayment of less than 5%: 1.35%
annually
- 15-year loans with a downpayment of 10% or more: 0.45%
annually
- 15-year loans with a downpayment of less than 10%: 0.70%
annually
Annual MIP is spilt into 12 parts. The percentage is based
on the year's starting balance such that a homeowner with a $100,000 30-year
FHA mortgage and making the minimum 3.5% downpayment will pay $108.33 monthly,
or $1,300 per year.
