mortgages Lower mortgage insurance fees could save borrowers money

Thinking about buying a home with a Federal Housing Administration mortgage? Or maybe you’re a vet or active-duty military and can buy using a Veterans Affairs or VA mortgage?

It’s best you delay signing that mortgage application until March 20 after the White House announced Wednesdaythat it was lowering annual housing costs on FHA mortgage insurance.

Here’s an example

Assuming a minimum 3.5% down payment on a $500,000 mortgage, the borrower would save $125 monthly because the monthly mortgage insurance premium or will be calculated at a lower rate. Currently, the monthly mortgage insurance is calculated at 0.85 per dollar of the loan. The FHA is lowering that rate to 0.55, effectively saving a borrower $1,500 a year.

If your so-called FHA high-balance loan ranges from $726,201 to $1,089,300 (for the counties of Los Angeles and Orange) your MMI goes from 1.05% to .75% with less than 5% down. For example, a $1 million loan amount will save you $250 per month, dropping from $875 to $625. You will save $3,000 per year.

The MMI sticks around for the life of the loan in the examples above.

So why lower the monthly mortgage insurance rates now?

FHA’s mortgage insurance fund is overflowing, accumulating a reserve pool “more than five times the required threshold set by Congress,” the White House statement says. HUD was able to recalibrate premiums and pass those savings to consumers “without jeopardizing the long-term sustainability of FHA’s mortgage insurance fund.”

“This is terrific news for borrowers who have been frustrated by the general run-up in mortgage rates,” said Brad Seibel, head at Sage Mortgage. “This reduction will translate directly into lower payments for the consumers and provide first-time homebuyers with a positive lift just when they need it the most.”

Even though more than 80% of FHA borrowers are first-time buyers, you don’t necessarily have to be one yourself. FHA-insured mortgages accounted for 7.5% of home sales (nationwide) in the third quarter of 2022.

The White House estimates the MMI adjustment will help 850,000 homebuyers and homeowners in 2023 by lowering their housing costs.

Recent statistics

In the third quarter of 2022, the most recent data available, more than 224,000 FHA mortgages were originated, according to the company ATTOM Data Solutions.

The lowered insurance rate also is available to refinance deals, but in my view, these are not in play as mortgage rates are twice as high as they were a year ago.

Now consider Southern California’s recent FHA purchase market data.

ATTOM reports that from October 2021 through September 2022, Los Angeles County saw 100,837 FHA deals, Orange County had 36,731, Riverside County had 46,167 and San Bernardino County had 36,112.

“(FHA) buyers in San Bernardino County were more than twice as likely to use an FHA loan as those in Los Angeles and almost seven times as likely as purchasers in Orange County,” said Rob Barber, CEO at ATTOM. “While not cheap by any means, the median home value in the third quarter of 2022, based on ATTOM data, was $495,000 in San Bernardino County and $570,000 in Riverside County. That was likely more affordable to first-time buyers compared to the median third-quarter prices of $830,000 in Los Angeles County and $975,000 in Orange County.”

FHA was oftentimes the only deal in town for marginally qualified borrowers, including those with the lowest middle FICO score of say under 680 and higher debt-to-income ratios, for example.

Conventional mortgage giants Fannie Mae and Freddie Mac recently changed their risk-based pricing schemes, providing improved pricing to borrowers with lower FICO scores at the expense of borrowers with higher FICO scores. And Fan and Fred now charge 0.375% more in fees for many borrowers with a debt-to-income ratio of more than 40%. If you are putting 10% or less down, be sure to compare FHA pricing to conventional pricing.

The Feb. 14 Department of Veterans Affairs policy update offers a 0.15 basis-point reduction of the VA Funding Fee, or VAFF, for loans closed on or after April 7.

For example, the VAFF goes from 2.3% to 2.15% for a zero-down VA loan. On a $500,000 loan, the one-time VAFF goes from $11,500 to $10,750 or a $750 savings.

Freddie Mac rate news: The 30-year fixed-rate averaged 6.5%, 18 basis points higher than the previous week. The 15-year fixed-rate averaged 5.76%, 25 basis points higher than the previous week.

The Mortgage Bankers Association reported a 13.3% mortgage application decrease from the previous week.

Bottom line: Assuming a borrower gets the average, 30-year fixed rate on a conforming $726,200 loan, last year’s payment was $1,169 less thanlast week’s payment of $4,590.

What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with 1 point: a 30-year FHA at 5.625%; a 15-year conventional at 5.5%; a 30-year conventional at 6.125%; a 15-year conventional high-balance at 6.125% ($726,201 to $1,089,300); a 30-year high-balance conventional at 6.625%; and a jumbo 30-year fixed at 6.375%.

Note: The 30-year FHA conforming loan is limited to loans of $644,000 in the Inland Empire and $726,200 in Los Angeles and Orange counties.

Eye-catcher loan program of the week: a 30-year VA fixed rate at 5.375% — with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected].