A couple days ago, I wrote about the quickly approaching expiration of the Homebuyer’s tax credit. If you were already looking to buy, it’s a great incentive. However, there is bad news on the horizon for the approximately 30% of buyers that will receive FHA-insured mortgages. The costs of an FHA loan are slated to increase on April 5, 2010.
• FHA stands for Federal Housing Administration
• FHA insures loans by private lenders (in other words, the money does not come from the FHA)
• Allows 1st time homebuyers to put down as little as 3% and receive up to 6% towards closing costs as opposed to the 10% minimum down payment of conventional loans
Because the FHA is insuring your loan, you pay for that with an insurance premium. There is an upfront premium and an annual premium. The upfront premium is being raised from 1.75% of the loan amount to 2.25%. That means the buyer will have to bring more money to the table at closing. For example, the upfront insurance premium on a $125,000 home will jump from $2,187.50 to $2,812.50…a $625 difference that could have been used to furnish a room in your new house! This can be rolled into the loan, but of course that means interest over time and an even higher payment in the long run. The annual premium has not increased (yet), but that is probably on the horizon. FHA director has already indicated seeking congressional approval. If it is granted, the upfront premiums may be scaled back slightly to balance out the annual premiums.
The reason for these changes are largely in part due to the high number of foreclosures in recent years. Since many of these foreclosures were FHA insured, much of their cash reserves went to paying back lenders. If I had to guess, it was more than expected, and the increase is needed to make up the difference.
I really appreciate Ronnie’s comment regarding purchasing a home
BF and I refuse to buy a home, notwithstanding the immense amount of pressure we’re getting. Our incomes, put through the metrics, say we can afford it; our reality says we can’t. We got the same pressure when graduating from grad school–oh rates are so low right now you HAVE to buy. That was in 2005…enough said .
It is SO IMPORTANT to know what YOU can afford, how this decision impacts every other area of your life, and how you’re going to work through it. It’s awesome for people who were planning to buy anyway, but the $8,000 credit isn’t enough to compensate for the real estate tax and maintenance and furnishing that I’d be solely responsible for. You broke this down so nicely!
An FHA insured loan is still a good option, but I’m very thankful to be qualified for a VA loan right about now!