There’s good news for prospective Charlotte-area home buyers with good credit. The FHA has lowered minimum down payment requirements and mortgage insurance premiums on affordable homes. Fortunately, Charlotte’s suburbs include many residences that meet the affordable home requirement.
Lower Down Payment
In late 2014, the FHA announced that the minimum down payment for FHA loan guarantees would drop down to three percent, as long as no borrower on the loan has owned a primary residence for three years. The previous minimum was five percent. The start date for this new program is December 13, 2014 for Freddie Mae and March 23, 2015 for Freddie Mac.
The lower minimum down payment will help a significant number of borrowers. This is a significant development. For example, on a $200,000 loan, the minimum down payment drops from $10,000 to $6,000. That $4,000 decrease opens up opportunity for that many more Charlotte-area home buyers.
Lower Mortgage Insurance Premiums
In January 2015, the FHA significantly lowered the mortgage insurance premium (MIP) on FHA loans with less than 20 percent down. Previously, the MIP rose to an annual rate of 1.35 percent, plus 1.75 percent upfront MIP, in April 2013. In January 2015, the rate was lowered to 0.85 percent plus the 1.75 percent upfront MIP. The rate reduction was the first one since 2001. It means that the MIP has been reduced a significant 37.5 percent. For many home buyers, the rate reduction could mean approximately $900 in annual savings.
The new policy reflects a positive change in the FHA’s reserve balance in its Mutual Mortgage Insurance Fund. In late 2013, the FHA received $1.7 billion from the United States Treasury to shore up its depleted reserves. It was the first emergency infusion of cash ever required in the agency’s 80-year history. Now, better loan performance, coupled with rising home values, has grown the reserve balance to an estimated $7.8 billion, the largest such balance reported in a number of years.
Credit and Affordability
To qualify for these better terms, a borrower needs to have good credit, and the borrower needs to purchase an affordable home. Qualified Mortgage regulations that went into effect in 2014 deem a home affordable if the mortgage, along with other minimum monthly payments on household debt, will not exceed 43 percent of the borrower’s gross monthly income.
Fortunately, many available residences in Charlotte’s suburbs meet this affordability standard given the household income of many qualified borrowers. Opportunity is even greater because of low mortgage interest rates. The benchmark 30-year conventional mortgage carries an interest rate that is at a 20-month low. With the new, lower MIP factored in, the effective annual FHA loan rate on a 30-year conventional mortgage is now in the low fours
Low mortgage interest rates, lower FHA mortgage insurance premiums and lower minimum down payments will combine to bring more prospective buyers into the Charlotte residential real estate market.