The FHA loan is popular among today's U.S. home buyers.
Along with ultra-low FHA mortgage rates which rival those from Fannie Mae and Freddie Mac, FHA loans are attractive because they offer a minimum downpayment requirement of just 3.5 percent — the lowest of all widely-available loan programs.
And now, a new Federal Housing Administration program — the Homeowners Armed with Knowledge program — is expected to add to the program's allure.
Via FHA HAWK, first-time home buyers will get access to reduced mortgage insurance premiums (MIP) at closing and, after 18 months of payments, will earn an MIP reduction which lasts the life of their loan.
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The Federal Housing Administration (FHA) is the world's largest mortgage insurer. It was first formed 80 years ago as an act of Congress; part of the National Housing Act of 1934.
In 1934, it was difficult for home buyers to borrow money from a bank. Because the economy was still reeling from the Great Depression, banks typically enforced home downpayments of fifty percent or more on loans; and required complete loan repayment in 5 years or fewer.
Terms like these precluded homeownership for many would be buyers and, not surprisingly, more than 60% of Americans were renters.
Then came the FHA and its flagship mortgage insurance program, which has helped make homeownership possible for more than 34 million Americans since its inception.
The premise of the FHA's mortgage insurance program was simple. Much like an auto insurer insured policyholders against loss from damage or accident, the FHA agreed to insure lenders against loss from lack of payment (which is known as "default" in mortgage terminology).
To get its insurance, the FHA published standard eligibility requirements which all loans were required to meet. Today, those requirements include a minimum credit score reading of 580; proof of citizenship or legal residency; and a 3.5% downpayment.
The FHA program was revolutionary for the U.S. housing market. Neighborhoods stabilized as loan defaults dropped and homeownership rates crossed 60 percent by the early 1960s.
Today, FHA loans account for approximately 1 out of every 5 new loans.
When an FHA loan goes bad, the agency repays lenders from its Mutual Mortgage Insurance (MMI) fund. The Mutual Mortgage Insurance fund is the account into which FHA mortgage insurance premiums (MIP) are paid each month.
By law, the account is required to maintain a balance equal to 2% of the FHA's outstanding insured loans and for the agency's first 60-plus years, it met this requirement ably.
A rash of defaults between 2009-2012, though, dropped the FHA's insurance reserves into negative territory.
To recoup lost money — and to meets its federally-mandated 2% reserve requirement — the FHA was forced to raise its mortgage insurance premiums five times in 5 years.
Today, the FHA charges mortgage insurance in two parts.
The first MIP is charged at closing and it's called the FHA Upfront Mortgage Insurance Premium, which some lenders abbreviate as UFMIP. The second MIP is charged on-going as part of your monthly mortgage payment.
This payment is called the Annual Mortgage Insurance Premium.
FHA MIP varies based on your downpayment and the length of your loan. All FHA purchase loans are subject to an upfront MIP payment of 1.75%, or $1,750 for every $100,000 borrowed.
Annual MIP is spilt into 12 parts. The percentage is based on the year's starting balance such that a homeowner with a $100,000 30-year FHA mortgage and making the minimum 3.5% downpayment will pay $108.33 monthly, or $1,300 per year.
Few home mortgage calculators make accommodations for FHA MIP, so if you plan to use an FHA loan for your upcoming purchase or refinance, make sure to apply the mortgage insurance schedule listed above to determine your overall monthly mortgage obligation.
As the FHA's reserve fund dwindled last decade, the agency raised its mortgage insurance premiums five times to help offset its losses.
As a result — despite the lowest mortgage rates in history — today's FHA mortgages can be cost-prohibitive. Buyers now pay 1.75% in upfront MIP plus up to 1.35% annually to the FHA. The FHA recognizes this as an issue and wants to make its loans more accessible.
In May, the agency announced FHA HAWK.
"HAWK" is an acronym. It stands for Homeowners Armed With Knowledge and, via the program, the FHA aims to give its home buyers access to counseling and education which it believes will reduce future FHA loan defaults.
In an official announcement, the FHA notes that first-time home buyers who partake in counseling experience a 30% reduction in default and serious delinquencies as compared to first-time buyers who do not partake in counseling. It also notes that lenders save close to $1,000 per counseled loan.
Via the Homeowners Armed with Knowledge program, the FHA plans to grant incentives to first-time buyers who agree to home counseling and financial education.
"HAWK Homeowners" will be granted reduced upfront mortgage insurance premium, reduced annual mortgage insurance premiums, and, with a strong payment history, access to an MIP reduction after two years have passed since closing.
The HAWK program is designed to make homes more affordable for FHA home buyers, and to improve the overall loan quality of the FHA's portfolio. Homeowners using FHA HAWK will pay less to their lender monthly, and will realize a lower APR as compared to homeowners not using HAWK.
With lower monthly payments for its borrowers, the FHA expects fewer loan defaults which will help the agency rebuild its reserves more quickly. With more reserves, the FHA may eventually lower its MIP charges for all of its insured borrowers.
No timetable for an FHA MIP reduction has been established.
The FHA HAWK program is proposed as a four-year pilot, and will be available to U.S. home buyers on a first-come, first-served basis. In order to qualify as a HAWK Homeowner, the FHA will enforce the following criteria.
The FHA HAWK program is for first-time home buyers only. In order to qualify as a first-time home buyer, you must not have been the owner of a home in the 36 months preceding your loan application.
The HAWK program is not available to existing homeowners looking to buy another home, nor is it available as part of the FHA Streamline Refinance.
First-time home buyers wanting to participate in the HAWK program must complete a minimum six hours of housing education or counseling via an approved counseling agency, which your lender can recommend.
Topics covered will include understanding the home purchase and mortgage process; how to evaluate mortgage products and programs; and, the rights and responsibilities of homeowners versus renters, among other subjects.
Pre-housing counseling must be completed at least 10 days prior to the ratification of a contract. This means that 10 days must pass at least between the completion of your counseling and the date you go into contract for a home.
If you sign a sales contract before the ten day-period has passed, you'll be HAWK-ineligible.
The HAWK program requires first-time buyers to attend one hour of pre-closing counseling in order to be program-eligible.
In this second phase of counseling, buyers will review their mortgage loan information; will re-review the costs of homeownership; and, will set expectations for the closing process.
Buyers are required to complete their pre-closing counseling within the time period beginning with the date of loan application, and ending with the date 3 days prior to closing.
Buyers who complete both pre-closing counseling requirements will get access to the 0.50 percentage point reduction in upfront MIP; plus a permanent 0.10 percentage point reduction in annual MIP.
The FHA HAWK program contains a post-closing element as well. Home buyers are required to complete one hour of counseling no sooner than 30 dates post-closing, and no later than one year post-closing.
Post-closing counseling is meant to help homeowners prepare a household budgets; understand their responsibilities as homeowners; and, know what to do in the event of financial calamity.
Homeowners who complete post-closing counseling and who, within the loan's first 18 months, successfully avoid a 90-day delinquency will earn a permanent 0.15 percentage point reduction in their MIP.
The cost of post-closing HAWK homeownership counseling is expected to be paid by your lender.
The FHA HAWK program is not yet live. It's expected to be ready for fall. HAWK is expected to make FHA loans more accessible to U.S. home buyers, and to strengthen the FHA's loan portfolio.
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