When the monthly rates are averaged and compared to the average over the years no big seasonal pattern emerges. These calculations involve averaging all the January rates and comparing them for the overall average of the annual rates. The calculation is repeated for each of the months. The month with the lowest average mortgage rate, according to the FHA data, is April. May and August were the next lowest, only a hundredth of a percent higher than the April average.
Now, let’s talk about the benefits of an FHA mortgage loan. While federally insured mortgages are less risky to lenders, there are also many benefits that make FHA mortgages attractive to borrowers.
- While conventional loans do not usually fund housing repairs, FHA mortgages set up an escrow account designated for contractor repairs. The borrower is required to provide estimates for the repair work together with details describing the work needed and the nature of the repairs.
- Borrowers who may have had some past credit problems may more easily qualify for a FHA loan because the federally backed mortgage insurance makes them less risky to lenders.
- However, the personal credit history will determine the percentage required for down payment from individual borrowers. Nevertheless, the percentage required for a down payment is usually less than a conventional mortgage.
- FHA mortgages do not allow penalty clauses for prepayment.
- Closing costs can be financed with the mortgage and are usually lower than conventional mortgages.
HOW AN FHA MORTGAGE IS FUNDED:
The borrower is required to pay a mortgage insurance premium that is put into an account that funds the FHA program. When the defaults increase the government must react to make sure that the funding remains sufficient. In other words, the government will bail you out if for some reason the account that funds the FHA program falls through.
Now, let’s talk about why defaults would be on the rise. Over the last couple of years, FHA mortgages had an increasing default rate. This can be attributed to several factors:
- In the past, FHA mortgages had more liberal credit ratings. Therefore, borrowers with weaker credit scores and little cash savings were qualifying for loans more easily.
- Larger mortgages tend to have higher default rates.
- Larger mortgages have more room to fluctuate in value and therefore, buyers have a greater chance of losing equity with them.
- Often borrowers qualifying for larger loans are more knowledgeable and have a better understanding of how loss of equity affects their investment so they may be more likely to default.
Since there was an increase in defaulting purchases the requirements for applying for an FHA mortgage have become more stringent.
· Mortgage insurance premiums will increase and now range from 1.75 to 2.25%. Since defaults have been increasing, a higher mortgage insurance premium will help fund the federal government’s increasing costs covering more defaults.
· A credit score of at least 580 is required to qualify for an FHA mortgage, but many lenders require higher qualifying FICO scores. Higher required FICO scores make borrowers a better risk and therefore, less likely to default.
· Lower FICO scores and higher debt to credit ratios require a larger down payment. A larger down payment reduces the size of the loan resulting in a more manageable monthly payment.
· Sellers could formerly fund up to 6% of the closing costs, but in 2010, sellers were only be able to contribute a maximum of 3%.
There are four different types of FHA mortgage loans.
· Fixed Interest Rate Mortgages - The 203 (b) program allows borrowers to finance about 97% of their home loan. Additionally, closing costs can be financed or can be a gift. More recently, due to the increasing default rate, the program has been changed to require down payments of 3.5% as opposed to 3%.
· Adjustable rate FHA mortgages are adjusted based on the one year Treasury Bill index rate and may rise no higher than 5% of the initial interest rate. Before obtaining an adjustable rate, have the lender explain the index and research how rates were affected in past years. Adjustable rate mortgages may appeal to homeowners who intend to keep their homes for only a few years.
· Insured Rehabilitation Mortgage - This program, under 203 (k), finances the home purchase and needed repairs that are approved. The borrower is required to submit detailed information about the nature of the work and cost estimates. This loan is attractive for home owners purchasing an older home or home in disrepair. Financing for repairs makes it easier for home owners to improve their purchases, which ultimately enhance the community as well.
· Reverse Mortgages - Lenders who are at least sixty-two years old can seek an FHA insured reverse mortgage which will allow them to receive a monthly stream of income from their equity. Qualifying applicants do not need to repay the loan until they sell their home or pass away.
A Fixed Rate Mortgage is the most common.
There are a few things to be considered when you are applying for a Reverse Mortgage:
· Home Equity - There must be sufficient equity in the home to make a reverse mortgage viable.
· Age of Homeowner - The monthly income available from a reverse mortgage will be influenced by the length of time the homeowner is estimated to live.
· Rates - The higher the interest rate, the lower the monthly stream of income from a reverse mortgage. Even though the home owner may be using the money to live, in theory higher interest rates give the home owner the ability to invest the money and receive a higher rate of return on it.
· FHA insured energy efficient mortgages (EEM) allow qualified lenders to finance energy efficient improvements. The borrower must qualify for an FHA loan equivalent to the purchase price. Energy efficient improvements can help reduce costs to the upkeep of your home over time by reducing fuel electrical and water bills. There may also be tax benefits for certain energy efficient improvements.
· FHA mortgages also offer, under Section 245, insured graduated payments mortgage (GPM) which provide lower payments that gradually increase over the life of the loan at various yearly increments. These mortgages can be beneficial to borrowers who expect salary increases, inheritances, or other increased sources of income down the road.
Although FHA mortgage loans are often competitive, if you are a first-time homeowner or planning to replace your existing home, now may be the time to act.
If you are purchasing a home that you expect to turnover in a few years, an FHA assumable mortgage will be particularly attractive and make your home easier to sell.