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Chris Sorensen's Blog

By Chris Sorensen | Real Estate Pro in California

Low FHA Rates Are Offset Due To Insurance Cost. Blame Fraud.

FHA Rates are at historic lows, but the benefits are muted due to the massive increases in Mortgage Insurance Premiums.

These increases have much to do with the losses FHA suffered due to defaults from FHA loans originated by those who claimed FHA was the “new sub-prime” in 2007 through 2009.

Loan Originators, many of whom are likely still doing loans today, would “borrow” for a fee another entity’s FHA approval and originate FHA loans. A common practice at the time was to submit said loans to FHA Underwriters paid on a bonus basis for approvals. If you are not aware, this was and is illegal. Getting caught was rare.

As one can imagine, this put those who attempted to do business honorably at a competitive disadvantage, as loans turned down would later be approved by these individuals and companies who had little to no long-term risk associated with their actions.

Sadly, today’s professionals and buyers are paying the price due to over-reaching regulations and dramatically increased mortgage insurance premiums.

FHA is not a mortgage lender, nor does it “set” FHA mortgage rates. Rather, it is a government agency, which insures mortgage lenders against losses on loans meeting specific minimum standards.

Loans that meet FHA minimum standards are eligible for FHA financing. For loans like these, banks provide mortgage rates based on the going price of a Ginnie Mae (GNMA) mortgage-backed security (MBS). A mortgage-backed security is a bond openly traded via Wall Street.

While FHA does not and cannot set interest rates, they can and do set insurance premiums borrowers must pay.

FHA MIP can add up to 1.55 percentage points to your “effective FHA mortgage rate”.

The Federal Housing Administration has raised its premiums five times since 2008 in order to keep its Mutual Mortgage Insurance fund flush with cash.

The effective FHA mortgage rate you pay is the actual FHA mortgage rate from the lender, plus the annual rate of insurance charged by the government.

The FHA most recently raised its mortgage insurance rates April 1, 2013, lifting annual mortgage insurance premiums to as high as 1.55%. This jump offsets the effects of the lowest FHA mortgage rates in a lifetime.

The good news is that some FHA-insured homeowners are exempted from rising MIP. Via the FHA Streamline Refinance, homeowners whose current mortgage carries an endorsement date of May 31, 2009 or earlier pay just 0.55 percent in annual MIP.

In order to meet FHA Streamline Refinance requirements, current FHA-backed homeowners must show that :

1.At least 6 mortgage payments have been made on your current mortgage
2.No mortgage payments have been missed in the last 3 months
3.There is a “net tangible benefit” to refinancing; a legitimate purpose
For homeowners meeting FHA Streamline Refinance standards, the mortgage approval process is simpler.

There is no appraisal required, so negative equity is not a factor. There is no verification of income, assets and employment, based on official agency guidelines, but many lenders have what is known as “overlays” or additional requirements to off set risk.  Call your lender to find out what they may be.

All FHA-insured homeowners are eligible for the FHA Streamline Refinance — not just the “grandfathered” ones.

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