Like many things involving Trump, there seems to be some confusion about what he actually did to FHA financing this past weekend. Scanning the headlines I saw statements ranging from “Trump raises interest rates…” to “Trump increases the cost of mortgages.” Since it was a little surprising his first action as president impacted my industry, I figured I’d try and clear up some of the confusion about what actually happened.
What is FHA financing?
FHA loans are mortgages that are insured by the Federal Housing Administration. The FHA does not loan money, they simply insure approved loans. Because these loans are insured by the FHA, the qualification requirements are generally more lenient than conventional financing, which has made them very popular with lower income and first-time home buyers. Borrowers can qualify for an FHA loan with as little as 3.5% down and a credit score of 580. And because the loans are insured by the government, the interest rates are typically the same as (or slightly better than) conventional financing.
To cover the costs of insuring these loans the FHA charges mortgage insurance premiums. FHA loans incur two types of premiums: an upfront fee that is paid at closing and an annual premium. Currently the upfront rate is set at 1.75% of the loan value, while the annual rate is set at .85%.
On January 9th, the U.S. Department of Housing and Urban Development (HUD) announced that the annual rates for FHA loans would drop by a quarter of a percentage point, bringing them roughly in line with what they were before the housing crash. The Obama administration had previously increased these premiums several times in order to shore up the FHA’s capital requirements, which had fallen below congressionally required levels.
Since then however, the FHA has regained its required capital reserves, and interest rates have begun to rise. HUD Statements show that the premium reduction was an attempt to offset some of the increased costs homebuyers are now facing because of rising mortgage rates.
What did Trump do?
On January 20th, Trump simply suspended the pending rate cut from going into effect. While there’s been a lot of speculation as to why, it’s been reported that some Republicans are concerned that capital reserves are still too low, and they decided to act before the change went into effect on January 27th.
What impact will it have on Atlanta homeowners?
Since the original insurance reduction only applied to new loans with a closing date on or after January 27th, rates aren’t actually increasing. However, homebuyers who were considering FHA financing could have seen a reduction in their overall monthly payments had the rate cut not been suspended.
While the amount of savings would have varied based on the loan amount, here’s what the cut would have looked like for homeowners in Atlanta:
• Atlanta’s median home price is currently $201,600, so if you put 3.5% down, the loan amount would be $194,544, and the quarter point rate reduction would save a typical new homeowner roughly $486 per year, or $40 a month.
• FHA loan limits vary depending on country but the current limit for most counties in the Greater Atlanta Area is $358,800. At this amount, new homeowners would have saved $897 per year, or almost $75 a month.
While the real impact will be difficult to accurately measure, the National Association of Realtors® released a statement Friday saying that it, “…estimates, roughly 750,000 to 850,000 homebuyers will face higher costs, and 30,000 to 40,000 new homebuyers (nationwide) will be left on the sidelines in 2017 without the cut.”
Considering buying or selling a home? Here are a few resources and related articles:
How to Get the Most for Your Home – Part 1: Preparation
Atlanta Real Estate Predictions for 2017
Why Photography is so Important in Atlanta’s Real Estate Market
Dear Real Estate Agent, What Were You Thinking? How to NOT sell your home…
How to Get the Most for Your Home – Part 2: Positioning and Promoting your Home