With mortgage rates averaging below 4 percent this year, and with a recent cut in mortgage insurance rates, there’s been a boom in FHA lending. According to the Federal Housing Administration, FHA loan counts grew 73% as compared to the year prior. Some of the increase is linked to homebuyers using FHA loans for purchase, but it’s the FHA’s flagship refinance program the FHA Streamline Refinance, which is leading closed loan counts higher. Between April and June of this year, FHA Streamline Refinance counts nearly tripled as compared to last year as homeowners raced to lock in long-term savings on their FHA home loans. Does the FHA back your home mortgage? If you haven’t considered the FHA Streamline Refinance, take a look and see what you could save. FHA mortgage rates on low-cost loans now average near 3.75%.
The Federal Housing Administration (FHA) is a division within the U.S. Department of Housing and Urban Development (HUD). It provides insurance to mortgage lenders for when home loans “go bad”. Loans insured by the FHA are known as “FHA loans” (even though the FHA isn’t actually making the loan). FHA loans are available via most mortgage lenders and, in order to qualify, mortgage borrowers are required to meet certain minimum standards. For example, FHA loans may only be made on owner-occupied homes of four units or less. This means that FHA loans can be used for properties including single-family homes, 2-4 unit homes, town homes, row homes, and condos; but cannot be used for a residence of 5 or more units. Additionally, borrowers are required to have a mortgage FICO score of 500 or better. These two examples, along with the rest of the FHA’s minimum standards, comprise the “FHA loan guidelines”. Loans which meet FHA standards are insurable and, therefore, approvable.
The FHA insures mortgage loans for multiple purposes, including for the purchase of a new home, and for refinance of an existing one.
It also offers provides insurance for “special” programs including home construction loans, energy-efficient loans, and loans for disaster victims. However, the FHA is best known for its primary program, the 203(b). The 203(b) is generically referred to as “an FHA loan” and, according to Ellie Mae, FHA loans accounted for nearly 1-in-4 closed loans in August 2015. Clearly, FHA loans are a big part of today’s housing market. Among the reasons why is that FHA guidelines permit borrowers to make very low down payments as part of the FHA program. In order to be insurable, the FHA requires borrowers to make a minimum down payment of just 3.5 percent. This is not the lowest down payment available to today’s mortgage borrowers that honor belongs to the VA loan; and even Fannie Mae and Freddie Mac offer a three percent down payment program. However, the FHA will insure loans for borrowers with below-average credit scores, which makes FHA loan the top choice for many of today’s buyers. FHA loans are also popular because of the agency’s home construction program, which is known as the FHA 203k Loan. Via the 203k programs, borrowers can finance the purchase of a home and its required home repairs in a single home loan closing. Repairs can be minor (e.g.; new appliances, new paint) or major (e.g.; new roof, new landscaping). 203k loans, like all FHA loans, are available in loan sizes up to the local FHA loan limit. The FHA has insured more than 34 million homes since its inception in 1934. It is the world’s largest insurer of home loans.
U.S. homeowners have been relying on the FHA a lot this year.
The number of FHA loans closed between April-June of this year rose 73% as compared to the year prior, returning to levels not seen since 2013, when mortgage rates were approaching three percent.
Loan volume, as measured in dollars, doubled. There are two main reasons why FHA loan counts have climbed. The first reason is that U.S. mortgage rates have been below their year-ago levels for most of 2015; and consumers are taking advantage. Any time mortgage rates drop, it changes the conversation of “Should I rent or should I buy?” and today’s favorable market is giving renters reasons to buy. Additionally, low mortgage rates spur refinances as homeowners move to lock up long-term savings. A homeowner reducing its mortgage rate by just 50 basis points (0.50%) can save tens of thousands of dollars over the life of its loan. The second reason why FHA loan closings are up is the new FHA policy on FHA mortgage insurance premiums (FHA MIP), the insurance payment FHA-backed homeowners pay as part of their monthly mortgage. In January 2015, the FHA reduced its FHA MIP by 50 basis points (0.50%) per year. Combined with this year’s lower mortgage rates, the drop in FHA MIP lowered the cost of an FHA loan to its lowest point in history. Existing FHA-backed homeowners jumped on the news. Using a special FHA refinance program known as the FHA Streamline Refinance, homeowners moved to refinance quickly. And, because the FHA Streamline Refinance requires only limited documentation, many closings took place in 30 days or fewer. The FHA Streamline Refinance doesn’t ask lenders to verify income, assets, or credit; and, a home appraisal is not required as part of the process. FHA Streamline Refinance volume is up 257% from the year prior. If the FHA backs your current mortgage and you haven’t explored an FHA-to-FHA refinance, take a look while rates are still low.
FHA loans are an important part of the U.S. housing market and with the government’s move to lower rates for FHA MIP, FHA loans are more enticing than during any period in history.
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