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FHA's New Program

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Posted On: 08/13/2014

Question:

Is it true that the FHA is offering a new loan program with lower mortgage insurance premiums? If so, how can I get in?

Answer:

HUD has announced plans to introduce a new FHA loan product later this year for first-time homebuyers, probably in the fall. Called “HAWK” for “Homeowners Armed with Knowledge,” the plan is expected to save borrowers about $325 a year in annual costs, plus hundreds of dollars up front at closing. How much individual borrowers actually save depends in large measure on the amount borrowed.

We call them “FHA loans,” but the FHA does not actually loan money. It’s an insurance plan that allows borrowers to purchase homes with little down, typically 3.5 percent up front plus closing costs, instead of the 20 percent lenders would really like to get. As with all insurance plans there are premiums to pay, and for most FHA borrowers those premiums are 1.75 percent of the loan amount at closing plus 1.35 percent annually on the unpaid balance.

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The FHA has been roundly criticized because insurance premiums have risen substantially in recent years. HUD also has been criticized because reserve fund balances have shrunk as a result of foreclosure claims, thus requiring higher premiums. The HAWK program seems like a way to address both complaints. Here’s how it works:

The program is open only to first-time buyers. A “first-time buyer,” as defined by HUD, includes not only those who have never owned a home but also those who have not owned during the past three years. The definition also includes people who owned as married couples and are now divorced, individuals who own mobile homes (homes not on a foundation) and those who now own properties that are not up to code and likely cannot be brought up to code. In short, the definition of a first-time buyer likely is broader than most people expect.

Under the HAWK program the borrower’s up-front mortgage insurance premium is reduced from 1.75 percent to 1.25 percent. If you borrow $200,000 that’s a savings of $1,000.

The government is not just giving this money away. It wants something in return, and what it wants is six hours of ownership counseling for buyers. The cost for such counseling can be as much as $350 under HUD rules; however, it may be less in some cases.

Next, the annual mortgage insurance premium is reduced from 1.35 percent to 1.25 percent. For the borrower with a $200,000 mortgage this means a savings of about $200 in the loan’s first year.

Lastly, if the borrower makes full and timely payments for two years, and if the borrower attends a 1-hour post-closing counseling session, the annual mortgage insurance premium will dip again, this time to 1.10 percent. Again the borrower will save, this time about roughly $300 a year for the borrower with a $200,000 loan. (The actual annual savings will vary depending the loan balance, an amount that falls each year.)

Is the HAWK program a good idea? You bet. According to EllieMae, FHA loans represented 22 percent of all mortgages originated in May. This means a huge number of people use the program, including many first-time buyers. For them the HAWK program, once formally introduced, is a quick and easy way to save money for years to come and who’s against that?

You can bet that HUD has studies that show that it pays out fewer claims if borrowers take counseling classes and when borrowers have a good repayment record during the first two years of the loan term. HUD is not offering lower insurance premiums as an act of charity, it’s doing so to cut claims and costs. And, again, who’s going to be against fewer claims and reduced foreclosures?

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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