Proposed Bill Lowers FHA Costs for Educated First-Time Buyers

June 6, 2012 2 Comments »
Proposed Bill Lowers FHA Costs for Educated First-Time Buyers

A new bill being floated by Representative Karen Bass (D-Calif.) aims to lower the costs of obtaining an FHA loan, which have surged in recent months.

Back in April, the FHA’s upfront mortgage insurance premium increased from 1% to 1.75%. On a $200,000 loan, we’re talking about an increase of $1,500, which certainly isn’t incidental.

The change was implemented to bolster the FHA’s capital reserves, which were drained as a result of the ongoing mortgage crisis.

But clearly this has made FHA loans a lot less attractive to first-time homebuyers, many of which rely on the agency’s signature low-down payment loan program, which requires just 3.5% down.

Enter the Homeownership Preservation Education (HOPE) Act

To offset some of these new costs, Bass has proposed new legislation, namely, the “Homeownership Preservation Education (HOPE) Act.”

In short, it provides a 0.25% reduction on the FHA upfront mortgage insurance premium for first-time homebuyers who complete a HUD-approved housing counseling course.

On that same $200,000 loan referenced earlier, a borrower would save $500 in closing costs, making homeownership more attainable and a little less painful.

The general thinking behind the bill is that more educated homeowners default less often, which reduces foreclosures and losses for the FHA.

As a result, these types of buyers should be able to catch a break on the costly upfront mortgage insurance premium.

While it may seem minimal, every little bit helps because purchasing a home can deplete your assets very quickly.

Look at Mortgage Alternatives

While this bill is certainly well intentioned, first-time homebuyers should also consider other loan options, such as conventional loans.

Though you generally have to come up with 5% down, you won’t have to deal with the pesky FHA upfront mortgage insurance premium, which is now ridiculously high.

Or look at programs such as Fannie Mae Homepath, which only require a 3% down payment and NO mortgage insurance.

If possible, you may also want to consider getting a gift for a larger down payment, that way you can avoid mortgage insurance altogether.

And with a loan-to-value ratio south of 80%, you’ll also enjoy a lower mortgage rate, which will decrease your mortgage payment and increase your affordability.

So along with the HUD-approved homeowner education course, educate yourself on all your loan options well before applying for a loan.

Also be sure to take the time to review your credit report to ensure there are not any errors holding you back from securing a lower rate.

Putting in the time to do some housecleaning before applying for a mortgage is probably the best way to save money.

By the way, beginning next week, the FHA is cutting mortgage insurance premiums for streamline refinances., which should be a godsend to scores of underwater homeowners.

Read more: Which mortgage is right for me?

(photo: cdsessums)

2 Comments

  1. Wes Moore June 6, 2012 at 3:15 pm -

    You got it ALMOST right. The FHA Upfront Mortgage Insurance Premium is not typically an “up front out-of-pocket” cost.

    In 24 years and thousands of FHA loans closed, I’ve seen maybe one consumer pay that in cash, “up front out-of-pocket. 99.99% of consumers finance it.

    Good idea on the bill, though. Whatever we can do to prevent more foreclosures, I am for.

  2. Colin Robertson June 6, 2012 at 3:30 pm -

    Good point Wes. It was merely illustrative to explain the savings more easily.

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