If you have been looking to buy, refinancing, or just thinking about it lately. You might have noticed it has become impossible to find 100% financing on your home. Keep in mind that F.H.A requires a 3% equity/down payment (even if you use down payment assistance, it is not a pure 100% mortgage).
What happened to the ability to do pure 100% financing, you ask? The way to understand it is that whenever you borrow over 80% of the value of the home (i.e borrowing $90K on a $100K house is 90% loan to value), you are required to carry mortgage insurance. This mortgage insurance is paid to a third party company as part of your total payment. The mortgage insurance is paid in, so that in the event that you lose your house, a claim is paid by the mortgage insurance company to your lender. This claim paid out by the mortgage insurance company helps offset the costs incurred by the lender for their risk-based exposure (that difference above 80% loan to value and what you owe). The exposure comes from the fact that if there was a foreclosure the lender would absorb back dated interest, recording fees, lawyer fees, just to name a few. This inevitably means that the lender wouldn’t yield what you owed them after a foreclosure takes place.
Recently, the mortgage insurance companies have been raising their rates (the amount we would pay per month) for our mortgage insurance. they have been doing this to continue raising capital so they can remain liquid.This can mean the difference of a payment being affordable and not. If your mortgage insurance was going to be $100 per month, now you could see that much higher, making your total monthly payment that much higher.
Where this all trickles back to us, is that the mortgage insurance companies have ceased insuring loans that have 100% financing. Meaning that even though there are loan programs that allow (for a short time longer) 100% loan to value (of the home). You can’t get the mortgage insurance necessary to qualify for the loan. So in a round about fashion, you can’t get the loan.
Why are they doing this? we know that there are about 6-8 main players in the mortgage insurance world. I recently found out that one of those companies alone is going to pay out 1.5 billion dollars in claims this year alone. Those claims are paid out to the lenders for insured mortgages. Now, if you multiply that by the number of mortgage insurance companies and their losses, you can understand why these mortgage insurance companies want us to put something (down payment) into the mix. It is far less likely for a homeowner to walk away from a house without trying to save it, if they had 5-10% down on the house. There are even 3 of those mortgage insurance companies that have had their ratings down graded by S & P and have to raise those ratings to be eligible to qualify to insure FNMA loans.
So as of right now, you are looking at 3-5% down on conventional loans to be eligible to get mortgage insurance to cover that loan above and beyond the 80% benchmark for not needing mortgage insurance.
The other impact we have been seeing is that the lenders have passed through a FNMA delivery fee for all loans with certain credit scores (about .25% of what you borrow). Combine that with mortgage insurance premiums being credit score based, and you can understand why F.H.A mortgages have become that much more popular.
I am fortunate to have been doing F.H.A mortgages consistently for the last 5 years. I understand them in and out, upside and down. There are many things folks don’t understand about F.H.A mortgages that will potentially kill your deal. If you have any questions feel free to shoot an email [email protected].
Ray
