In April, Mimi Nguyen found herself stuck in the process of trying to get a Federal Housing Administration loan for a condo she wanted to buy in Oakland. She had been trying for several months to obtain financing for the FHA loan. The process seemed to slow to a crawl.
• But then her loan officer told her she might be able to obtain conventional financing elsewhere, thanks to moves in the mortgage insurance industry this spring. Because of an improving housing market, several national insurers relaxed requirements for homebuyers who could not make a 20 percent down payment required on conventional loans.
• Nguyen discovered that she could meet those requirements. She received the financing she had been waiting for from a private mortgage company.
• “The wheels moved a lot faster once we went the (mortgage insurance) route. I think in the end, it was just a more efficient way to get a loan. The sellers were getting impatient and I think overall it was just the best option,” said Nguyen, who moved into her new home in June.
Mortgage insurance, which is paid for by the borrower, is meant to protect lenders from financial losses when borrowers default on loans. Premiums are typically included in monthly mortgage payments.
After the housing meltdown began, falling housing prices pushed banks to tighten lending requirements, and mortgage insurance providers to raise down payment and credit scores requirement.
So many people turned to FHA loans to help buy a home when they could not come up with a sizeable down payment. But as home prices began stabilizing in recent months in the Bay Area and other hard-hit markets, Walnut Creek-based PMI Mortgage Insurance Co. and other providers lowered minimum down payment requirements from 10 percent to 5 percent for loans up to $417,000. Minimum credit score requirements were also lowered.
The result is a bright spot in the housing market: Improving home prices have made it easier to get mortgage insurance for conventional loans, which expands loan options for homebuyers beyond FHA financing. Federally-insured FHA loans have a minimum down payment requirement of 3. 5 percent, but they often take longer to process than conventional loans due to inspection requirements.
The changes made it possible for Nguyen to obtain Genworth mortgage insurance for a loan obtained from San Ramon-based Bank of Commerce Mortgage.
“It’s back. We’ve got the return of another option for people to consider,” said Bank of Commerce mortgage banker Faramarz Moeen-Ziai.
“We are definitely seeing more business in our California insurance since April,” said Chris Antonello, vice president of marketing for Genworth, which last year removed other parts of the country that were on its so-called distressed list of regions as prices began improving.
FHA loans can be the right loan for some borrowers who may not qualify for a conventional loan. But FHA loans can be more costly in the long run, according to Antonello.
Monthly premiums tend to be less for FHA loans with a down payment of less than 5 percent. However, mortgage insurance premiums for conventional loans are usually made over a shorter period of time. That’s because the premiums no longer have to be paid once there is a 20 percent equity stake in the home.
“You can get out of it sooner,” said Antonello.
In April, the upfront premium for FHA loans increased from 1.75 percent to 2.25 percent of the loan amount. (The upfront premium can be included in the loan amount).
FHA loans also carry a monthly premium (0.55 percent for loans with a down payment of less than 5 percent and 0.50 percent for loans with a down payment above 5 percent) that is tied to the loan amount on top of the upfront premium requirement. FHA loans that last 15 or more years require payment of the monthly premiums for the first five years, even if the borrower has reached the required 22 percent equity stake.
“In the last 12 to 18 months, many people flocked to FHA loans. Now we are seeing a shift to conventional loans. It really is providing an opportunity for us,” he said. Contact Eve Mitchell at 925-952-2690.