For homebuyers, the grass keeps getting greener. Not only is it the most affordable time to buy since 1985, with today’s mortgage payment being $1,000 cheaper, but if a new bill passes, low-down-payment homebuyers may get to pay 25-percent less mortgage insurance.*
Here’s more on the new bill that may benefit first-time homebuyers if it passes:
- The House passed the Housing Financial Literacy Act of 2019, or H.R. 2162, on July 9, 2019.
- The new bill cuts the upfront cost of mortgage insurance for first-time homebuyers with FHA mortgages.
- First-time homebuyers must undergo housing counseling on sustainable homeownership to receive a 25 percent, or 25 basis point, upfront discount on FHA mortgage insurance.
- The Mortgage Bankers Association (MBA) backs this bill to make homeownership more attainable with some changes — that any legislation affecting the FHA still allow the HUD to set evidence-based mortgage insurance premiums.
- H.R. 2162 is moving on to the Senate before it can be signed by the president. Currently, the bill has yet to undergo critical processes that could significantly change its details, if indeed it is passed as a law.
“Pay less” is exactly what you want to hear as a homebuyer. By making a low-down-payment mortgage program even more affordable, this new bill may be especially helpful to renters looking to save on the initial cost of purchasing a house if it is fully approved.
FHA mortgage insurance vs. PMI: There’s a difference
Private mortgage insurance is also called PMI, and it’s attached to conventional loans with less than a 20-percent down payment. FHA loans, on the other hand, have two mortgage insurance premiums, also called MIP, paid upfront and annually. Other government-backed loans don’t have mortgage insurance requirements, like USDA and VA mortgages.
The National Association of Realtors confirms that last year’s average down payment for all homebuyers was 13 percent. That number dipped to 6 percent for first-time homebuyers. Repeat homebuyers’ average down payment sat at 16 percent — most likely supplied by the sale of a previous property. So, putting less than 20-percent down is common.
If you put down less than 20-percent using a conventional loan, you’ll be required to pay monthly mortgage insurance until you reach 20-percent equity. Once you hit that 20-percent threshold, you can drop your monthly PMI payment. If you’re using an FHA loan, the same rules don’t apply, though you can drop your FHA mortgage insurance after 11 years and with a larger down payment. This difference makes the new bill all the more beneficial to FHA buyers, provided it passes through the Senate and is signed into a law.
“[PMI is] an insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20 percent.
Once you’ve built equity of 20 percent in your home, you can cancel your PMI and remove that expense from your mortgage payment.”
No down payment? No problem. We’ve got plenty of low- and no-down-payment home loans for you to pick from. Prequalify Now.
So, you’ll pay the monthly insurance policy premium as the borrower, with your lender being the beneficiary. Freddie Mac continues:
“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.”
Here’s how the mortgage insurance cost breaks down on a $200,000 home that has PMI and a 5 percent down payment, compared to the same scenario with 20 percent down and no PMI:**
Making a larger down payment can lower your monthly housing expense. But as Freddie Mac reminds all homebuyers:
“[PMI is] no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20 percent down payment.”
For a significant number of homebuyers last year, paying PMI on a conventional loan didn’t hold them back from buying their dream house. For FHA borrowers, there now may be a new incentive to buy: You’ll put down a lower down payment and may even pay 25-percent less upfront mortgage insurance if this new bill is approved.
Qualifying for an FHA, made easy
According to Freddie Mac and evidenced by today’s low rates, first-time buyers may be better off buying sooner. Rents are rising faster, up 3.9 percent a year compared to the previous 3.7-percent increase. Renting a house requires 28.2 percent of a renter’s income, but just 17.7 percent of income is needed to buy.
Even better, FHA borrowers only need a minimum of 3.5-percent down to qualify. And if this new bill goes through, one of your biggest upfront costs of homeownership could be 25-percent cheaper. Get connected with a local loan officer and get prequalified.
*”This is the most affordable time to buy since 1985,” HouseLoanBlog.net, June 2019; “Today’s mortgage payment is over $1,000 cheaper [INFOGRAPHIC].” HouseLoanBlog.net, July 2019.
**Figures shown are for illustrative purposes only.
For educational purposes only. Please contact your qualified professional for specific guidance.
Sources deemed reliable but not guaranteed.