When you finally decided it was time to buy a home of your own, you probably had visions of flower-filled window boxes, freshly mown grass, custom painted rooms and neat little touches that made it truly your own. You probably didn’t give a thought to things like interest rates and mortgage insurance premiums, but today’s the day to get those items on your radar. Of course your mortgage and real estate professionals will do their best to look out for your interests, but if they don’t work primarily with first time home buyers like yourself, there’s no guarantee they’re hip on the latest, greatest news for FHA borrowers.
Why All The Changes for FHA Mortgage Insurance?
Since the inception of the FHA, it has been their goal to help provide home loans to people who are just starting out, those who have little in the way of savings and borrowers with less than perfect credit. Over time, though, that practice has taken a toll — FHA took a big hit during the housing bubble to the tune of billions of dollars in claims against their mortgage insurance policies, stretching their funds to their capacity. Because of this, 30 year loans with less than a 10 percent down payment made after June 2013 can no longer have their mortgage insurance cancelled — it’s there for the life of the loan.
Before June 2013, FHA-insured loans in good standing with at least 22 percent equity and five years on the books always had their insurance premiums cancelled, allowing the homeowner a little more space to breathe. Now, that extra money goes into the FHA mortgage insurance fund to help clean up the huge mess that defaulted mortgages left behind. Because of this unusual insurance requirement, many buyers have started thinking twice before using an FHA product to buy their homes, hurting the FHA even more.
If you’ve been considering an FHA loan for your first home, there’s a great reason to use these fine loan products once again: FHA’s HAWK (Homeowners Armed with Knowledge). Under the HAWK program, home buyers who are willing to go the extra mile will be rewarded with reduced mortgage insurance premiums for the life of their loans. It still won’t make FHA mortgage insurance premiums as low as those on less risky Conventional loans, but it should be a big boost to first time buyers who are going to be stuck with lifetime mortgage insurance premiums.
What is FHA HAWK?
FHA HAWK is an upcoming pilot program designed to encourage first time homeowners (including anyone who hasn’t owned a home in at least 3 years) to become fully educated in homeownership before taking the leap. Starting this fall, you’ll have an option to participate in 3 education sessions in exchange for a significant drop in your mortgage insurance rate. These classes are distributed as follows:
- Pre-Contract Housing Education. You’ll be required to participate in at least 6 hours of individual housing counseling and educational courses covering general home buying topics. You must complete this component at least 10 days before you sign a contract on your new home.
- Pre-Closing Housing Counseling. Before you close on your home, you’ll need an additional hour of counseling to review your loan documents and help ensure that you understand the agreement you’ll be signing at closing. You can complete this component anytime between the date of your loan application and up to 3 days prior to closing.
- Post-Closing Housing Counseling. At least a month after closing, but before your first anniversary, you’ll need to visit your housing counselor one last time for a one hour session. This time, the topics will include budgeting for your new home’s expenses, home maintenance issues and education on resources that can help prevent foreclosure.
Once you’ve completed the first two components, you’ll receive a discount of a half percent on your upfront mortgage insurance premium, as well as a permanent reduction of a tenth of a percent on your monthly premium. After 18 months of on-time payments and completion of your post-closing counseling, you’ll get another reduction in your monthly mortgage premium, to bring the total discount to a quarter of a percent.
How Will It Affect My Mortgage?
If you’re like most first time homebuyers, the details of the deal are so overwhelming that you’ll start to feel like you’re drowning every time you read about mortgages. So, let’s get down to the brass tacks. What, exactly, does HAWK mean for you and why in the world should you waste 8 precious hours you’ll never see again on the program?
Let’s assume you’re buying a $150,000 home with a standard 30 year fixed FHA mortgage. You put just five percent down, making your loan principal amount $142,500. Under a standard FHA agreement, you’ll be paying 1.75 percent of the loan principal in upfront mortgage premiums (a whopping $2493.75) and another 1.3 percent of the current principal, divided into monthly payments, each year. If you keep that loan for the full 30 years and make each payment on time, you’ll have paid $35,778.32 in mortgage insurance premiums.
On the other hand, if you go through the HAWK program, your upfront premium on that same loan will only be $1,781.25 and your lifetime premium payments will total $28,981.56, including the upfront premium. That’s huge savings, and it only costs you eight hours of your time, split into three sessions — in fact, you’re saving roughly $850 for every hour you’re in classes and counseling.
|Traditional FHA||FHA HAWK||Savings|
|Annual Percent||1.3%||1.2% initially; 1.05% after 18 months||0.1% initially; 0.25% after 18 months|
|Payments After 1 Yr||$1,837.66||$1,696.30||$141.36|
|Payments After 5 Yrs||$3,642.08||$3,258.31||$383.77|
|Payments After 10 Yrs||$16,706.68||$13,810.48||$2,896.20|
|Payments After 20 Yrs||$28,590.59||$23,409.03||$5,181.56|
Bottom Line: FHA HAWK Is A Good Move For FHA Borrowers
If you’re planning on buying a home using an FHA product this fall or some time next year, you need to ask your lender about HAWK. This program has limited availability, though, so you may have to be patient in order to secure your spot. However, if you intend to spend more than a few years in your new home, it just makes sense to take the added discounts — after all, why pay more when you don’t have to?
The mortgage counseling and homeowner education may feel like a huge hassle, but as someone who has both given these types of classes and owned many homes, I can assure you that you’ll find something of use in the time you spend surrounded by experts who are willing and eager to answer your questions. There’s so much to owning a home that the process gets incredibly overwhelming, things get away from you during that fast-paced month before closing.
Take advantage of all the resources you have around you, including programs like FHA HAWK, and owning your first home will be filled with joy instead of confusion and unexpected heartache.