Annual default premiums (MIPs) on 30-year Federal Housing Administration (FHA)-insured loans for homebuyers with less than 5% down payment rose to 1.1 or 1.15% of the home value from 0.85 or 0.9%, effective April 18, 2011. For a homebuyer paying the minimum 3.5% down payment on a $400,000 home, the FHA’s recent increase in MIPs adds $83 to his monthly payment to the lender. Homebuyers who make down payments of at least 5% can obtain better rates with private mortgage insurance (PMI) companies whose insurance premiums decrease for higher down payments.
first tuesday take: The FHA or the myriad of private mortgage insurance companies may tweak their MIP/PMI premiums over and over again, but at the end of the day, the homebuyer must act the role of the sharp and savvy investigative consumer against lenders. The hindsight of lessons from the post-Millennium Boom housing crisis demands no less, and buyer’s agents need to be able to advise on the alternatives available to their buyers if they are to stay in the game.
For uninformed or inexperienced homebuyers, their real estate brokers and agents must be actively involved in the handling of the loan application process. Homebuyers need assistance with interview forms and advice on lenders while they shop for the purchase-assist financing to satisfy closing conditions – most likely the largest loan of their lives. [For more information on shopping for a loan, see the May 2010 first tuesday article, Shop, shop, shop until you drop.]
Lenders do not like to be faced with competition, but the buyer’s agent, who lenders refer to as the transaction agent (TA), needs to advise the homebuyer to submit loan preapprovals or applications to at least two different lenders. Lenders are required to issue homebuyers a Good Faith Estimate (GFE) at the time an application is received. This uniform requirement for delivery of the GFE itemizes loan closing costs and the interest rate charged. The GFE is designed primarily to provide a homebuyer who shops lenders to easily compare GFE content and choose the lender with the lowest costs and rates available. [For more information on the GFE, see the September 2010 first tuesday article, The Good Faith Estimate is designed for shopping around.]
In California, lenders are also required to deliver homebuyers a Department of Real Estate (DRE) mortgage loan disclosure statement (MLDS), which includes additional information on top of the GFE. [See first tuesday Form 204, 204-1 and 204-2.]
Agents and homebuyers have to be on guard. Some lenders shirk regulations and issue “loan scenarios” or “worksheets” instead of a GFE. Such alternate documents lack the clarity and protection which the GFE affords the prospective homebuyer. The surprise comes for the homebuyer just after they hand over an application and advance costs to that game-playing lender – and receive the real GFE. [For more information on lender obligations, see the January 2010 first tuesday article, Lenders take steps to avoid HUD’s updated GFE.]
The government can pass laws and regulations, but as we see, it takes brokers and agents in the guidance of their homebuyers to ensure lenders follow the rules. No one else is there to police lenders, leaving the buyer’s agent as the sole line of defense. This requires constant agent diligence since, given time, lenders do figure a way to work around the rules.
RE: “Dealing With Higher Costs of F.H.A. Loans” from the NY Times