Credit Counseling to Lower FHA Borrowers’ Payments
FHA announced a new program – Homeowners Armed with Knowledge (HAWK) – earlier this month that would allow FHA borrowers who complete counseling before closing to receive a 0.5 percentage point reduction in their upfront insurance premium. They will also see an annual premium drop by 0.1 percentage points.
Borrowers may also qualify for more savings too. Borrowers who take part in post-closing counseling and show a record of on-time payments for two years can receive an additional 0.15 percentage point reduction.
On an FHA loan with an average loan balance of $180,000, borrowers who go through counseling would be able to decrease their payments by nearly $325 a year in insurance costs – or $9,800 over the life of a 30-year loan, according to FHA.
In recent years, FHA has raised its premiums, a move that has been criticized for making their loans less affordable.
FHA decided to grant a slight break to those borrowers who go through housing counseling, after studies suggest that housing counseling leads to fewer mortgage defaults. For example, borrowers who were counseled prior to a home purchase were nearly a third less likely than borrowers who did not have counseling to default on their mortgage payments in the first two years after closing, according to a study conducted by NeighborWorks America.
“Counseling tends to make borrowers smarter about the debt they are taking on, so FHA should make up their modest loss in fees by lower default rates,” Jim Parrott, a senior fellow at the Urban Institute, told The New York Times.
To be eligible for the reduced rates, FHA borrowers must undergo a Department of Housing and Urban Development-approved counseling class. The changes are expected to roll out this fall as part of a four-year pilot program.