Last Friday, the Chicago Tribune reports, the Donald Trump administration axed a proposed cut to a type of mortgage insurance that helps lower- and middle-income first-time home buyers. The reduction, which was put forth by the Obama camp shortly before the former president left office, would have brought the premium rates on insurance for FHA-backed loans to 0.60 from 0.85 percent.
What is an FHA loan?
The Federal Housing Administration, Bankrate explains, insures home loans, protecting lenders in the event that borrowers default on their mortgage payments. Taking this route to purchase a home requires getting a loan from an FHA-approved lender and paying for the insurance the FHA provides. These mortgages are especially attractive to non-wealthy buyers because they ease the path to homeownership; borrowers qualify even if they have less-than-stellar credit and are making down payments as small as 3.5 percent.
Tim Beyers of mortgage consultancy American Financing, an FHA lender, explains that the major selling point of FHA loans is that they always have mortgage insurance. "If you have a conventional loan and you meet certain requirements, insurances get lifted," he says. "An FHA loan is supposed to be more expensive on back end, but it allows you to get into a place more easily because you have to put very little money down."
Obama's proposed cut would have lowered the monthly premium rate buyers paid on their FHA loan insurance. According to Time, the goal of the outgoing administration was to help aspiring homeowners to take their first step up the property ladder amid increasing mortgage rates. Now, without the discount, homeowners with $200,000 mortgages will have to pay an additional $500 per year.
That $500 works out to about $41 per month—not exactly a massive adjustment for owners with FHA-loans, as mortgage broker Melissa Cohn points out. "It would have been a quarter point reduction in premiums," she says. "I don't see that it has any real impact whatsoever."
It's also worth noting that during his tenure, President Obama presided over four increases to premium rates. Tim Beyers recalls that the Obama administration then cut rates in January of 2015 before introducing the second reduction earlier this month.
"There's always some debate about whether we should really be cutting rates right now, and whether that fund is stable enough. The Obama administration thought so. By virtue of this order, it looks like the new administration is saying maybe, but hold on a second," Beyers says. "There is some real money at stake but I tend to agree that it's not a huge amount of money by any stretch."
On the other hand, CNBC writes that the cut would have allowed up to 40,000 more Americans to qualify for FHA loans, because the lower monthly premiums would have improved their debt-to-income ratios. (The premiums are counted as debt; FHA loans have strict guidelines and stipulate that debt load must not exceed income by more than 43 percent.)
Why the cut has little impact on NYC buyers
Furthermore, for NYC residents, it's even more difficult to buy a home with an FHA-backed loan. Per the U.S. Department of Housing and Urban Development, the maximum loan amount that FHA will insure for a one-family home in the city is $636,150, which Cohn says eliminates many New York metro area properties.
One NYC couple learned this themselves when they attempted to purchase an FHA-approved condo. When writer David Boles recounted his experience back in 2013, he wrote that buying in the city with an FHA loan was "a great idea in theory, but impossible in reality." He notes the restrictions he encountered—including no co-ops, no buildings over eight stories tall, and high closing costs—and writes that brokers were reluctant to deal with buyers who didn't have the cash to put 20 percent down.
Even if Trump's elimination of the proposed cut poses little risk of hurting New York buyers, it could rattle homeowners of modest means in other parts of the country. The Tribune article points out that last year, the FHA insured 1.26 million purchase loans and refinances for single-family homes.
Furthermore, CNBC writes that the move is doing no favors to remedy nationwide declines in homeownership, and when Obama's cut was first announced, there was an attendent 7 percent increase in applications for refinancing.
Beyers says, though, that prospective homeowners on a budget should still consider FHA loans. "The bigger thing to take away, especially if you're a first-time home buyer looking at an FHA loan and you have that ability to use it, is that this does not change the attractiveness of it in any way," he says. "The level of benefit does not go away."
Removing the discount, though, could be perceived as a symbol of the Trump administration's general attitudes. "The gesture of taking it away is a bigger issue than the loss," Cohn says. "He says he's returning the White House to the people, but he's taking away something that would have meant a lot to many of the people who voted him into office. I think it's the message that counts more than the actual savings. "
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