Competitors shoot holes in FHA coverage

by Donald Horne28 Aug 2015
Federal Housing Administration (FHA) loans have made home ownership possible for tens of thousands across the country, but private market competitors are exploiting one weakness that could benefit clients.

“The total cost of MI (mortgage default insurance) over the life of a loan on a $200,000 home with 3% down would be $36,379 with FHA and $18,480 with United Guaranty,” says Bryon Jones, senior vice president in charge of strategic accounts for the latter. “The home buyer would save $17,899 with us.”

He’s not alone with other private default insurers in the market pointing to the same discrepancy in costs as market competition heats up.

Unlike FHA, private mortgage insurance cancels automatically when the principal balance of the loan reaches 78 percent of the original value of the property, whereas FHA insurance cannot be cancelled if the home buyer has made a down payment of less than 10%. (FHA insurance remains in place for 11 years when the home buyer pays 10 percent or more down.)

It is an opportunity for other lenders to highlight those differences for borrowers, says Jones.

A recent article in The Los Angeles Times has described the higher FHA costs as “onerous,” stating that borrowers with minor credit dings are increasingly being steered into FHA mortgages with higher costs that are described as “a poor person's tax” by John Taylor, chief executive of the National Community Reinvestment Coalition, a financial advocacy group for lower-income and minority neighborhoods.

Credit is loosening, but only to a degree. Fannie Mae, Freddie Mac, and FHFA are all working to encourage lending to lower-income buyers by reducing certain fees and by allowing down payments as low as 3%, which the GSEs approved in late 2014.

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