Effective October 4, 2010, FHA will be making changes to their Mortgage Insurance Premiums. As you know, borrowers currently pay 1.75% of their loan amount upfront which is called Upfront MIP. Additionally they pay .50% to .55% of their loan amount annually (actually paid in 12 installments with their monthly payment).
The new MIP structure will require an Upfront MIP of only 1% of their loan amount. The downside is that their annual MIP will increase to .50% to .90% paid on a monthly basis.
Give Me An Example of How This Impacts The Wallet
Here is an example of how the changes will impact FHA borrowers:
Loan Amount: $250,000
Upfront MIP: Currently $4,375
As of October 9, 2010 $2,500
Upfront cost is $1875 less BUT when the homebuyer sells or pays off the loan, part of this cost is refundable to the borrower
Monthly MIP: Currently $115 per month
As of October 9, 2010 $188 per month
Cost is $876 more per year
No portion of this monthly MIP is refundable to the borrower
What Is The Real Impact?
When an FHA homeowner sells their home, they are entitled to a refund of the unused portion of their Upfront MIP. The borrower is not entitled to any refund from the Monthly MIP they pay to FHA each month. So shifting the revenue stream paid to FHA from the Upfront MIP to the Monthly MIP is actually a win for FHA as less of the MIP paid by the borrower will be entitled to a refund.
The IRS allows homeowners to write-off the cost of mortgage insurance as long as their income is less than $110,000 per year. Shifting some of the MIP from Upfront to Monthly will actually give the homeowner a greater write-off on their tax return.
Higher monthly MIP will increase the borrower’s Debt-To-Income ratio and, in theory, make it slightly more difficult to qualify for the loan.
Net Effect: I believe the net effect to the borrower is negligible. Basically, these changes shift revenue within the government. FHA will enjoy higher revenues to offset their tremendous losses while the IRS will decrease their revenues as homeowners have greater mortgage insurance write-offs.
The economic recovery continues to slowly but steadily deepen its roots. Consumer sentiment ticked up in March and it appears businesses are feeling more positive as well. According to a CEO Economic Outlook Survey, America’s top CEOs are expecting an increase in sales, along with increased or stabilized capital spending and employment.
Over the past several months, the hot topic of health care reform took much of Congress’s attention. Now, with the bill passed into law, the government is turning its attention to other matters to help bolster the economy including the job bill and financial reform.
High unemployment and elevated levels of foreclosures and distressed homeowners continue to be two of the biggest factors in preventing a robust recovery. The government’s attentive attitude toward these obstacles is seen as a positive sign by industry and economic experts.
Existing Home Sales:
Existing home sales softened in February. According to Lawrence Yun, NAR chief economist, the widespread winter storms during the month may have masked underlying demand as “buyers couldn’t get out to look at homes in some areas and that should negatively impact near-term contract activity.” February sales of 5.02 million remained 7 percent above the 4.69 million-units last year.
Median Home Price:
The median price for an existing home was $165,100 in February, a 1.8 percent drop from February 2009. Distressed homes, which accounted for 35 percent of sales last month, continued to skew prices downward as they typically were discounted in comparison with non-distressed homes.
Inventory:
Total housing inventory rose 9.5 percent to 3.59 million, representing an 8.6-month supply at the current sales pace. Compared to the previous year, there were 5.5 percent fewer homes on the market.
Mortgage Rates:
Mortgage rates dipped to 4.99 percent in February from 5.03 percent in January. During the first week of April, rates crossed the 5 percent threshold but still remained near historically low levels. While the full effect of the Federal Reserve mortgage-backed securities purchase program’s expiration at the end of March is yet to be seen, the Fed echoed its accommodating policy to support the economy.
Affordability:
Affordability remains at record levels, supported by the lowest mortgage rates in decades, low home prices, and the first-time home buyer tax credit. The home price-to-income ratio continues to remain well below the historical average of 25 percent. The ratio now stands at 14.2 percent.
Sources: National Association of Realtors, Freddie Mac
Government Action:
Mortgage Relief for Unemployed:
Attempting to overhaul its foreclosure prevention program, the Obama administration took noteworthy steps to help the unemployed stay current on their mortgage through tough times.
While the trouble in the housing market stemmed originally started with loose lending practices, high unemployment and underwater homeowners are now the major factors contributing to foreclosure.
The program will now:
•Require lenders to “slash” payments for the unemployed for 3-6 months. In some cases, payments could be deferred entirely.
•Cut payments to at least 31 percent of previous income, about the same amount that unemployment insurance pays.
•Become effective over the next 6 months.
•Not require new taxpayer funds. The program has only used a
small portion of its $75 billion allocation.
Source: The Washington Post
Helping Underwater Homeowners:
Underwater borrowers are one of the major driving forces behind foreclosure. It’s estimated that one in four homeowners owes more than their home is worth. Economists categorize these borrowers as “high risk” because they can’t sell or refinance.
The government is taking the following steps to address underwater borrowers:
1.Principal Reduction. Lenders will be asked to reduce the principal loan balance if it is 15 percent or greater than what the home is worth. This will only be available to borrowers who are current on their mortgage payments and they will need to stay current to “earn” the full reduction over three years.
2.FHA Refinancing. The Federal Housing Administration (FHA) offers refinancing alternatives for borrowers who are underwater and offering incentives for lenders who reduce the principal on primary mortgages by at least 10 percent.
3.Second Mortgages. The government will double the incentive amount paid to lenders who help modify second mortgages. Half of all troubled homeowners have second mortgages, which have been an obstacle in providing modifications.
4.Short Sales. Incentives to lenders who help troubled borrowers that don’t qualify for the program, most commonly a short sale, have been increased. Source: The Washington Post
Topics For Buyers & Sellers:
Energy Efficient Tax Tips
Three Things You Need to Know About Home Improvements to Help Slash Energy Bills and 2010 Taxes
Simple qualifying improvements include increasing insulation or insulating items such as door and windows, roofing, skylights, etc. These qualify for a 30 percent credit on the cost of the item, not installation, up to a maximum credit cap of $1,500.
Certain big-ticket items have no maximum credit cap. The credit is still 30 percent of the cost of the item. These items include furnace, air conditioning, tankless water heater, heat pump, geothermal system, solar or wind installation.
It’s a tax credit, not a deduction. That means it reduces the actual taxes you owe, not your taxable income. Use IRS Form 5695, and hang onto receipts and product labels.
Don’t forget to checkyour state and local area for additional incentives.
