Top Personal Finance Blogs
Tuesday November 21st 2017

FHA Loan Changes are Coming

In the last few years, private mortgage lenders have been reluctant to approve new loans. As a result, the government-backed FHA has substantially increased its loans. Today, according to the CMPS Institute, FHA mortgages comprise nearly 30% of all existing loans compared to only 3% in 2006. FHA loans require only a 3.5% down payment compared to traditional mortgages which require 20%.

Unfortunately, this rapid growth has created increased risks and led to higher loan losses. According to the Department of Housing and Urban Development, 21.1% of FHA mortgages that originated in 2007 are now in either foreclosure, bankruptcy or delinquent over 90 days. This compares to 14.2% just a year ago. Of the loans originated in 2008, 17.3% are in this category compared to only 8.4% the year before.

The FHA’s loan loss reserve has fallen dramatically. As of September 30, 2008, the loan loss reserve stood at $19.3 billion. Now, as of June 30, the reserve is only $3.5 billion. The financing account of the FHA, which uses reserve funds to pay for loan losses, has risen from $9 billion at September 30, 2008, to the present level of $29.6 billion.

The FHA is concerned that the reserve fund and the financing accounts could be depleted if housing prices continue to decline. The FHA has implemented changes to strengthen the reserve accounts and to lessen future risks of loan defaults.

Increased Annual Insurance Premiums

The agency plans to increase the annual premium to a range of 0.85%-0.90% from the present range of 0.50%-0.55%. This premium, or PMI, is included in the monthly mortgage payment. However, the FHA will probably lower the mandatory upfront premium to 1.00% from the present 2.25%.

The FHA expects these changes to produce a net increase in premium income, which will provide more funds to cover future loan losses and reduce the decline in the loan loss reserve account.

Reduction in Seller Closing Cost Contributions

Previously, sellers could contribute up to 6% of mortgage closing costs. This will be reduced to 3%, which will increase the buyer’s financial commitment towards the purchase of his house.

Higher Credit Score Requirements

In the past, the FHA did not have an official minimum required credit score. That determination was left to the individual loan underwriters. Now, the agency has proposed a minimum required credit of 500 with a down payment of at least 10%. In order to qualify for a 3.5% down payment, the credit score will have to be at least 580. Nevertheless, these credit score minimums are still below the requirements of a conventional mortgage, which are 660 to 720 with a 10% down payment.

The FHA is also asking lenders to tighten underwriting criteria by more closely examining a borrower’s cash reserves, debt-to-income ratio and credit history. The effects are already apparent. As of April 2010, only 2.4% of FHA loans had credit scores less than 620 compared to 37.5% in January 2008.

While FHA requirements are still generous compared to traditional mortgage loans, they are becoming more stringent and qualifying will become much more difficult in the future.


8 Ways to Waste Money on Insurance

Consumers don’t like risk and that’s probably why insurance is such a big business in America. There are some types of insurance you absolutely should not go without, like health, disability or long-term care, auto, flood, and renters or homeowner’s insurance. But what about all those other policies out there being pedaled on TV and online? Should you buy them? Here are eight types of insurance policies to which you can comfortably say, “no thanks.” That wasted money is put to much better use buying the vital types of insurance you have been neglecting.

Private Mortgage Insurance (PMI)

You can’t always avoid PMI, but you should whenever possible. If you owe more than 80% of the value of your home on a mortgage, the lender is likely to force you to pay for PMI as a high-risk borrower. Focus all your energy on paying down your mortgage principal until it is under 80% of the home’s value, then kick PMI to the curb.

Credit Card Insurance

You see ads on television all the time that say, “How will my family pay my bills after I’m gone? I don’t want to leave them with that burden.” Well, as it turns out, that burden won’t be theirs to begin with. Credit card debt is unsecured debt. If there are no funds in the estate to pay the debt, then the credit card has no further option. They have no right to pursue your loved ones for the debt. You are better off using that $15 a month to pay down the principle and leave your cards paid down instead.

Some purchase credit card insurance in case of disability. But this type of insurance does little for you. It will only cover minimum monthly payments (and you know where that gets you) so the debt will not really get paid. In addition, most lenders will work with you if you are disabled. Disability insurance is a much better value for the money. That money can be used to pay down the debt instead of just stringing it along with minimum payments.

Mortgage Life Insurance

Just like credit card insurance, this policy will pay the balance of your mortgage if you pass away before paying it yourself. The only person this benefits is your lender, since they are the beneficiaries. A good life insurance policy will let your loved ones decide if they should pay off the house or sell it.

Children’s Life Insurance

What parent doesn’t want the best of everything for their children? Children’s life insurance seems like just one more good-parenting tip. While its true there is an off chance your child might grow to have a chronic illness making life insurance hard to get, more often than not, your kids will be able to get term insurance through their employers. Think hard about how much better of your child might be if you used the money to invest in college or a first home instead.

Extended Warranties

Warranties are simply not necessary. Most products break down during the manufacturer’s warranty period. The money you pay for the warrantee might be unnecessary. If you bought it with a rewards card that offers free warranties, it’s clearly a waste of money. A good warrantee plan costs the same as a maintenance visit minimum and gives you the option of buying the warrantee and having the visit covered by it instead. Then you have coverage for a full year for anything else that might go wrong. Some warrantees come with free technical service on computer products, another good reason to buy one.

But when you look at all the warranties in your home, chances are only one product has given you trouble. It’s also very likely that the cost of warranties overshadowed the cost of repairs on the troublesome appliance. Consider keeping keep a savings account instead and start putting $60 – $100 a year in it for each appliance. When something breaks, you’ll have the money sitting and waiting to pay for repairs or a replacement.

Physical Damage Auto Insurance

Collision and comprehensive auto insurance makes little sense for most cars. When the value of your car breaks even with the amount you have paid for physical damage insurance, stop paying for it. Start putting the money in a savings account so you can pay for damages if they happen. If your car is older than five years, it’s probably time to start saving that money instead of paying it.

Rental Car Insurance

Most people renting cars already have their own cars. If you don’t own a car, then rental insurance makes sense. But the insurance on the car you already own covers anything that happens in the rental, so why would you pay twice for the same thing?

Roadside Assistance

While being able to call for a tow without worrying about the cost is nice, there are cheaper ways to get this coverage than buying from your car insurance company. Dollar for dollar the charges are similar to a AAA membership, but the extra claims on your policy might hurt premiums in the long run. That’s why its smarter to keep roadside assistance on a separate policy for the same cost.