Massachusetts Home Buyer Guide

First-time home buyers in Massachusetts and around the country will want to speed up their home search, if they plan to finance the purchase of a home with a Federal Housing Administration (FHA) loan. 

FHA announced recently that fee increases and underwriting rules for FHA loans will increase the cost of homeownership for first-time and other borrowers. FHA loans are especially popular with first-time home buyers because the minimum down payment required is 3.5 percent, as opposed to 5 percent to 20 percent or more for conventional loans. In addition, FHA will lend to home buyers with credit scores a little lower than scores acceptable to lenders of conventional loans. 

The announcement from FHA that financing costs will increase came right after President Obama declared in his State of the Union address that, "Part of our rebuilding effort must also involve our housing sector." 

FHA claims it needs to increase fees to offset losses from bad loans insured just before the housing bubble burst.

FHA will raise the annual mortgage insurance premium, sometimes referred to as "PMI," on most loans that have a case number starting April 1, 2013 or later. To get a case number before the April 1st deadline and avoid the increase, borrowers should apply with a lender no later than March 25, 2013, according to lenders. There have been two other mortgage insurance premium increases since 2011. 

The annual mortgage insurance premium will increase on most FHA loans by 0.10 percentage point – sometimes referred to as 10 basis points – or $100 per year for each $100,000 in loan amount. For example, a $360,000 loan would cost a borrower an additional $30 per month in mortgage insurance. For loans more than $625,000, with a term of more than 15 years, the increase will be 0.05 percentage point, or $50 per year for each $100,000 in loan amount. The premium increases do not apply to borrowers refinancing an existing FHA loan from on or before May 31, 2009 into a new FHA loan under the streamline-refinancing program.

FHA is not changing the one-time mortgage insurance premium home buyers pay up front at closing. The "upfront PMI" as it is commonly referred to remains at 1.75 percent of the loan amount.

In what could potentially make FHA a viable option for only home buyers with lower credit scores and only 3.5 percent to put down, FHA will require most borrowers to continue paying annual mortgage insurance premiums for the life of the loan. New loans with case numbers starting June 3, 2013 will be subject to this change. It is recommended that borrowers formally apply by May 24, 2013 to avoid this costly change. 

Previously, FHA automatically canceled mortgage insurance when a borrower (a) made enough payments to reduce the balance to 78 percent of the original loan amount and (b) five years had past. Typically, a borrower with a 30-year loan and 10 percent down eliminated mortgage insurance in about six years, or in five years, if the borrower made extra principal payments. 

An exception to the June 3rd change will be loans that have a loan-to-value ratio of less than 90 percent (i.e., down payment of more than 10 percent). FHA will cancel the mortgage insurance premium after 11 years when the the balance drops below 78 percent of the original loan amount.

Other FHA loan changes apply to underwriting rules. One such change starts June 3, 2013, when FHA will mandate “manual” underwriting of applications by borrowers whose total household debt-to-income ratios exceed 43 percent and who have credit scores below 620. For practical purposes, there are few lenders that will give a loan to individuals with credit scores below 620, so this rule change may not impact many home buyers.