The FHA finally released details about its much anticipated HAWK for New Homebuyers pilot program, which offers savings on mortgage insurance premiums to borrowers who complete housing counseling courses.
The agency revealed today that borrowers who complete housing counseling before signing a contract to purchase a home AND pre-closing housing counseling will receive a 50-basis point reduction in upfront mortgage insurance premium (MIP) costs, along with a 10-basis point reduction in the annual MIP cost.
At the moment, the upfront MIP on FHA loans is 1.75% of the loan amount, so those who take part in HAWK (Homeowners Armed with Knowledge) will whittle that number down to a more reasonable 1.25%.
This fee is typically financed into the loan amount, so borrowers will save money on interest each and every month they pay their mortgage because of the smaller outstanding balance.
As far as annual premiums go, they range anywhere from .45% to 1.55%, with those taking out 30-year mortgages paying a minimum of 1.30%. For those that put down the minimum 3.5% and go with a 30-year fixed (pretty common), the annual fee is 1.35%.
All of these numbers would drop by .10%, which would provide additional savings to borrowers who complete the required counseling with independent non-profit organizations.
Additionally, borrowers who participate in post-closing counseling and stay current on their loans (no serious delinquencies after two years) will receive another 15-basis point reduction in annual MIP costs.
So for a borrower subject to the common 1.35% annual MIP, they’d see it drop to 1.10% after two years assuming they paid their FHA loan on time each month.
All in all, the savings are expected to total about $325 a year for the average home buyer ($180,000 loan amount), or roughly $9,800 over a 30-year mortgage term, which is certainly nothing to sneeze at.
Why Are They Offering a Discount for Counseling?
HUD is willing to offer the sizable discount because research has proven that mortgage delinquency rates for borrowers who have received counseling are 29% lower for first-time home buyers and 15% better overall.
Those are pretty strong numbers, so it will cost them less money to provide a discount to borrowers who actually understand what they’re getting into when purchasing a home.
At the same time, HUD has been getting a lot of flak from organizations like the National Association of Realtors, who have argued that the FHA is pricing out hundreds of thousands of would-be homeowners with all its recent premium increases.
This move should put those concerns to rest and increase business at the FHA, which has been waning thanks to the increased costs. Their book of business should also improve with better-educated buyers paying on time more often.
And with an incentive to stick with the FHA for a longer period of time, the agency can make more money by avoiding early prepayments.
As it stands now, many borrowers simply refinance into conventional loans after a short period of time to avoid the long-term costs associated with FHA loans.
The details of the HAWK for New Homebuyers four-year pilot program are open to comment, so final MIP reductions may vary based on the feedback received. Stay tuned for more details as they come!
Update: The House Appropriations Committee approved the fiscal year 2015 Transportation, Housing and Urban Development funding bill on May 21st, but included a provision prohibiting the use of funds for the the Homeowners Armed With Knowledge (HAWK) program. So while well-intentioned, it may not actually come to fruition.