President Barack Obama announced a major step taken by his administration to make mortgages more accessible and affordable to lower-income buyers. The president targeted the mortgage insurance premiums in his attempt to make homeownership more accessible to low income buyers.
This reduction of the premiums is the latest effort of the U.S. government to expand mortgage access and counteract the tendency of stricter lending standards implemented since the beginning of the financial crisis.
According to the White House, this reduction will help creditworthy families cut $900 off their mortgage payment each year. Overall, this change will help millions of Americans put aside billions of dollars in the following years, supporting the housing market’s recovery.
The purpose of the mortgage insurance is to cover losses in case homeowners default and the foreclosure is not enough to recover the costs. Usually, this coverage is necessary when the borrower’s down payment is less than 20% of the home’s price. Do you have more questions about mortgage insurance? Maureen Martin can offer her advice and expertise as a mortgage professional.
The Federal Housing Administration (FHA) is an important provider of mortgage loans for first time buyers, insuring almost one-fifth of all the mortgages in the U.S. Back in 2013. FHA was forced for the first time in its history, to draw on taxpayer funds worth $1.7 billion, and managed to return to the black mostly by increasing the mortgage insurance premiums.
Will the cut of the insurance premiums have a big impact?
So far, the housing financing reform has led nowhere, with Democrats trying to increase mortgage access to low-income and first-time buyers, and the Republicans wanting to decrease the role of the US government in the market.
Some analysts believe that many will welcome the cut, but that it will not have the expected impact on the housing industry. The ones who will benefit from this will be the average borrowers, but the benefits will not bring about higher earning estimates and increased housing demand.
On the other hand, the FHA expects, in the following three years, the rate drop to offer 2 million borrowers the possibility to save around $900 each year when they refinance or purchase a home. The agency estimates that this move will encourage an average 250,000 first time buyers to make a purchase and enter the housing market.
The Federal Housing Administration premiums cut enables an annual drop in mortgage fees from 1.35% to 0.85% for a typical borrower who makes a down payment less than 5% and takes a loan up to $562,350 (In San Diego County, the loan size varies from county to county). This means that, for a loan of $200,000, the borrower would save almost $1,000 during the first year. Borrowers who make a down payment of 5% or more could see their premiums cut from 1.3% to 0.8% for 30 year fixed rate FHA mortgages.
All in all, this move will make the housing market friendlier to the low income Americans and to all the citizens who have been kept out of the market so far by the high prices practiced by FHA. Now, anyone will have the possibility to buy a home and get rid of the status of being a renter.
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