Proposed Bill Lowers FHA Costs for Educated First-Time Buyers

Last updated on March 20th, 2014

A new bill being floated by Representative Karen Bass (D-Calif.) aims to lower the costs of obtaining an FHA loan, which have surged in recent months.

Back in April, the FHA’s upfront mortgage insurance premium increased from 1% to 1.75%. On a $200,000 loan, we’re talking about an increase of $1,500, which certainly isn’t incidental.

The change was implemented to bolster the FHA’s capital reserves, which were drained as a result of the ongoing mortgage crisis.

But clearly this has made FHA loans a lot less attractive to first-time homebuyers, many of which rely on the agency’s signature low-down payment loan program, which requires just 3.5% down.

Enter the Homeownership Preservation Education (HOPE) Act

To offset some of these new costs, Bass has proposed new legislation, namely, the “Homeownership Preservation Education (HOPE) Act.”

In short, it provides a 0.25% reduction on the FHA upfront mortgage insurance premium for first-time homebuyers who complete a HUD-approved housing counseling course.

On that same $200,000 loan referenced earlier, a borrower would save $500 in closing costs, making homeownership more attainable and a little less painful.

The general thinking behind the bill is that more educated homeowners default less often, which reduces foreclosures and losses for the FHA.

As a result, these types of buyers should be able to catch a break on the costly upfront mortgage insurance premium.

While it may seem minimal, every little bit helps because purchasing a home can deplete your assets very quickly.

Look at Mortgage Alternatives

While this bill is certainly well intentioned, first-time homebuyers should also consider other loan options, such as conventional loans.

Though you generally have to come up with 5% down, you won’t have to deal with the pesky FHA upfront mortgage insurance premium, which is now ridiculously high.

Or look at programs such as Fannie Mae Homepath, which only require a 3% down payment and NO mortgage insurance.

If possible, you may also want to consider getting a gift for a larger down payment, that way you can avoid mortgage insurance altogether.

And with a loan-to-value ratio south of 80%, you’ll also enjoy a lower mortgage rate, which will decrease your mortgage payment and increase your affordability.

So along with the HUD-approved homeowner education course, educate yourself on all your loan options well before applying for a loan.

Also be sure to take the time to review your credit report to ensure there are not any errors holding you back from securing a lower rate.

Putting in the time to do some housecleaning before applying for a mortgage is probably the best way to save money.

By the way, beginning next week, the FHA is cutting mortgage insurance premiums for streamline refinances., which should be a godsend to scores of underwater homeowners.

Read more: Which mortgage is right for me?

(photo: cdsessums)

About the Author: Colin Robertson

Before creating this blog, Colin worked as an account executive for a wholesale mortgage lender in Los Angeles. He has been writing passionately about mortgages for 15 years.


What Is a HomePath Property? A Foreclosure With Surprising Advantages

HomePath properties and the 2008 housing crisis go hand in hand. Until the housing bubble burst in 2008, the Federal National Mortgage Association, aka Fannie Mae, had one main job: to keep mortgage loan money flowing to help American home buyers fulfill their dreams of homeownership.

Then the Great Recession happened, and as 4 million homes went into foreclosure, Fannie Mae suddenly (and somewhat reluctantly) became the country’s largest homeowner. To find new owners for those properties, Fannie Mae created HomePath, a program that sells foreclosures to eager buyers.

“During the foreclosure crisis, we had many properties come back to us,” says Julia Dugger, Fannie Mae’s director of marketing and agent performance, based in Washington, DC. “Suddenly, we were a very large player in the primary market.”

How HomePath works

Fannie Mae had never worked directly with home buyers, but at the height of the crisis it had 162,000 houses to sell. The HomePath program maintains, upgrades as needed, and sells Fannie Mae–foreclosed properties through a network of contractors and real estate agents around the country. is the online listing service where you can easily find such properties in each state.

Home, Sweet HomePath

Fannie Mae has one goal for the 55,000 HomePath single-family homes and condos currently on the market: Get a fair market price for a foreclosed property.

“It’s important for us not to give away the farm,” says Dugger, correcting a common misconception that the HomePath program has rock-bottom bargains. “There’s no upside for us to depress the market further.”

After Fannie Mae forecloses on a property (Dugger says they strive to do everything possible to avoid doing so), it cleans the place up, adds some cosmetic flourishes if needed, and spruces up the landscaping to increase curb appeal and make it move-in ready, just like you would.

“We are a huge consumer of paint and carpet to freshen up” the houses, Dugger says. “No one will want to pay full price for a house that looks like the foreclosure on the street.”

A local listing agent who has a contract with HomePath then markets the property like any other listing. But here’s where HomePath properties differ from others.

Fannie Mae HomePath has a soft spot for owner-occupants who will make a house a home. So for the first 20 days a property is on the market, Fannie Mae considers only contracts from owner-occupants and nonprofits that help them.

“We want someone who is moving into the home to stay there and care for it,” Dugger says. If the property doesn’t sell in the first 20 days, then Fannie Mae lets flippers and other investors bid.

Advantages of a HomePath property

Dugger says HomePath properties have three major advantages.

  1. The HomePath program gives owner-occupiers (home buyers who will use the home as their primary residence) 20 days to act before investors. Investors often gobble up foreclosures before the little guys even know they’re available.
  2. Fannie Mae HomePath will pay up to 3% of closing costs, an average of $5,000, for first-time home buyers who successfully complete its six-hour, online homeownership training class. The class explains the fundamentals of buying, owning, and maintaining a home.
  3. All properties are listed, and all offers are accepted online at, which makes the process “transparent,” Dugger says. “Fannie Mae can see all offers, and we select those that are the highest and best.”

If all goes well, eventually HomePath will have close to zero inventory. At least, that’s what Fannie Mae hopes.

“We’d love to go out of [the home-selling] business,” says Dugger, who admits that’s a long shot. In the meantime, “we’ve built an infrastructure to support the volume that comes, and we’ve changed the perception of foreclosed properties. More owner-occupants are interested in looking at foreclosures than ever before.”

Financing a Fannie Mae HomePath property

Fannie Mae has several financing options to help you purchase HomePath real estate. Fannie Mae loan options are designed especially to help multigenerational home buyers, as well as low- to moderate-income households.

Fannie Mae HomePath mortgage products allow for innovative underwriting flexibilities (such as counting income from a rental unit or boarder), energy-efficient upgrades, and second mortgages. Fannie Mae can also include home improvement costs in your home loan.

You still need a down payment and a credit score to get a loan, but the down payment required may be lower, and your down payment can be from more flexible sources of funds. You may have to pay private mortgage insurance, but you can cancel the mortgage insurance payments when your equity reaches 20%.

Of course, you can always get a loan from a mortgage lender if you have a good credit score and enough cash for your down payment and closing costs. You may want to compare mortgage rates and get pre-approved by a lender before you start shopping for a home.