FHA, conventional mortgages tangle
WASHINGTON — Is the Federal Housing Administration losing some of its post-boom, post-bust oomph? Is the Obama administration's plan to gradually throttle back FHA's home mortgage insurance volume already having effects — and if so, what might this mean to you as a buyer? There are definitely signs that something's brewing:
• FHA put its second increase in premium charges in six months into effect Monday. Higher premiums mean higher monthly payment requirements for buyers, and could have the effect of squeezing some consumers with tight budgets out of the market entirely.
• The private mortgage insurance industry, which competes with FHA for borrowers who make low down payments, is touting its newly resurgent conventional mortgage products, which may offer significant monthly savings when compared with FHA.
Brian Chappelle, a principal of Potomac Partners, a mortgage banking industry consulting firm in Washington, says he worries about the direction FHA has begun pursuing. "FHA's role was designed to be the first rung on the homeownership ladder. If you raise fees, increase down payments and lower mortgage limits, it would be a serious impediment for future buyers and the economy."
Chappelle's concern stems from the Obama administration's February "white paper" on housing reform in which policymakers called for higher down payments across the board — including at FHA. To date, no increases have been proposed by the agency, but some analysts think that a move to a 5 percent minimum down — up from the current 3.5 percent — would not be surprising in the months ahead. FHA's maximum loan amounts might also drop significantly in October if Congress does not renew the current economic recovery law ceilings, which now top out in high-cost areas at $729,750.
Given these developments, how does FHA financing stack up against rivals in the low-down payment space right now? Private mortgage insurers have a quick response: They say their lower monthly costs already are winning back some of the business they lost to FHA during the rough times of the recession.
For instance, Radian Guaranty Inc., a major home loan insurer, claims that in the wake of FHA's premium increases, a low-down payment conventional mortgage carrying its insurance coverage now requires monthly payments 15 percent lower than FHA-insured mortgages for borrowers with FICO credit scores above 720. Radian provided this cost-comparison example to illustrate: Say you've got FICOs above 720, and you need a $285,000, 30-year loan with 5 percent down at a 5 percent interest rate.
The FHA mortgage would cost $1,806 in principal and interest per month. The same loan insured by Radian would cost anywhere from $1,530 a month to $1,753, depending on type of premium payment plan you chose. The cheaper alternative would involve an upfront cash payment of the insurance premium; the higher cost alternative would involve standard monthly premium payments.
Brien McMahon, chief franchise officer of Radian, said in an interview that as a general rule, private insurance on low-down payment loans will now beat FHA whenever the buyer puts down 5 percent and has a 720 or higher FICO, or puts down 10 percent and has at least a 680 FICO.
So does this mean that all buyers with low down payments should now abandon FHA in droves and switch to conventional loans? Hardly. David Van Waldick of Western Realty Finance in Carlsbad, Calif., says the majority of FHA users can't fit into the private insurers' high-FICO, strict underwriting model, so those vaunted savings may be illusory. FHA, by contrast, continues to offer much higher and more flexible maximum debt-to-income ratios, far more generous underwriting and lower down payments, and will accept FICO scores that conventional lenders and private insurers won't touch.
Bottom line: If you're purchasing a home with a small down payment, check out both FHA and the private alternative with your loan officer.
Kenneth R. Harney can be reached at email@example.com.