In a landmark announcement, FHA said it will reduce its monthly mortgage insurance premium in January 2015.
The move will save the average home buyer $100 per month and could spur millions more renters to become homeowners.
The current annual mortgage insurance premium, or MIP, is equal to 1.35% of the loan amount but will drop by one half of one percent to 0.85%. The FHA loan could rise in popularity thanks to the real savings afforded to new buyers.
FHA Mortgage Insurance Reduction Substantial
Since 2013, there has been a market shift from away from FHA and toward conventional financing. Consumers shied away from paying high FHA high mortgage insurance fees. Things got worse when FHA MIP became payable for the life of the loan in April 2013.
The significant FHA MIP reduction could mark a reversal of that trend.
According to the National Association of Realtors, the average price for a single-family home is $252,800. At this price, an FHA buyer will save over $100 per month.
But buyers in higher-priced areas could save a lot more.
The “floor” FHA loan amount is $271,050. This dollar limit applies to many lower priced, non-metro areas. But FHA sets much higher limits for more expensive markets.
The FHA loan limit in Seattle, Washington is $517,500. That amount is exceeded in Los Angeles, California with a limit of $625,500.
A buyer applying for a $450,000 FHA loan will save $180 per month. That’s enough to help a denied FHA borrower obtain an approval.
To qualify for an FHA loan, the borrower must meet debt-to-income (DTI) limits. This is the ratio of the borrower’s income compared to debt payments. The borrower can have monthly obligations up to 41% of their gross income including their new home payment. Many borrowers qualify with a higher DTI with compensating factors. The lower mortgage insurance premiums will bring down the home payment and therefore DTI levels across the board. Lenders will start approving more FHA borrowers.
What’s more, buyers will be able to qualify for a more expensive home. According to California loan officer Brad Yzermans, some buyers will see their buying power increase by 8%.
Lower FHA MIP on All Loans Longer Than 15 Years
Most borrowers opt for 30-year FHA loans with the minimum down payment of 3.5%. But FHA MIP can change with different loan criteria like loan amount and down payment. Former and updated MIP levels are as follows.
|20, 25, 30-Year FHA Loans|
|Loan Amount||Down Payment||Previous MIP||New MIP|
|Below $625,500||Less Than 5%||1.35%||0.85%|
|More than $625,500||More than 5%||1.30%||0.80%|
|Below $625,500||Less than 5%||1.55%||1.05%|
|More than $625,500||More than 5%||1.50%||1.00%|
FHA loans with terms 15 years or less will not receive MIP reductions. Current FHA MIP for loans 15 years and less is as follows.
- Loan amount less than $625,500 and down payment less than 10%: 0.70%
- Loan amount less than $625,500 and down payment more than 10%: 0.45%
- Loan amount greater than $625,500 and down payment less than 10%: 0.95%
- Loan amount greater than $625,500 and down payment between 10% and 22%: 0.70%
- Loan amount greater than $625,500 and down payment greater than 22%: 0.45%
When Does Lower FHA MIP Go Into Effect?
The new mortgage insurance premiums are effective for loans with FHA case numbers on or after January 26, 2015. The lender pulls an FHA case number, usually as the first step in the FHA loan application.
If you already have a case number but the loan is not yet closed, FHA has said you can cancel your case number and re-order on after January 26th. Your lender has access to FHA’s system to cancel and re-order the case number.
Those whose loans have closed already will need to wait to refinance with an FHA streamline refinance after six mortgage payments and 210 days have passed since loan closing. At that time, they can apply for a new FHA loan with lower MIP.
Chart of Historical FHA MIP Changes
FHA is not in the habit of reducing its MIP costs. In fact, the mortgage backing agency has raised its upfront or monthly premiums seven times since 2008.
Below is the most recent and accurate FHA MIP change history chart for loans with terms greater than 15 years and down payments less than 5%.
|Change Date||Upfront MIP||Monthly MIP||Monthly Cost per $100,000 borrowed|
|Before July 2008||1.5%||0.55%||$46|
Opponents of high MIP such as the National Association of Realtors said that FHA had gone too far with ever-increasing premiums. Too many would-be buyers could not qualify for other programs, nor afford FHA.
Future homeowners and housing associations alike are applauding the move the make FHA loans more affordable.
An Explanation of FHA Mortgage Insurance
What is FHA MIP and why is it necessary?
Many new home buyers ask that question when they see extra fees on their FHA loan estimates.
In short, paying FHA MIP is like paying auto insurance premiums. When everyone pays into the system, they build up a fund to pay for the relatively small percentage of participants who have an incident.
But unlike the auto world, an “incident” isn’t a payout of a few thousand dollars for car repairs. Losses could be in the tens or even hundreds of thousands for each foreclosure action.
The FHA Mutual Mortgage Insurance Fund, or MMI, is set up to cover such losses. Because potential losses are greater, FHA MIP payments are greater than those for car insurance. The fund insures almost 8 million home loans totalling billions of dollars.
The system works well, except when there are more losses than expected.
In 2012, FHA had burned through its capital reserves and was $16 billion in the hole due to high foreclosure rates. To date, over 20% of all FHA loans opened in 2006 and 2007 are labeled “distressed” meaning in foreclosure or having payments 90+ days late. FHA took a $2 billion cash infusion to prop up the fund and keep the FHA loan program viable.
Hence the step-ladder increases of FHA MIP rates since 2008. Money was going out faster than it was coming in. The solution was to charge more. Arguably, new FHA buyers were paying for the mistakes of those who came before. But FHA remained a popular choice for first time home buyers who didn’t have the higher credit and down payment needed for a conventional loan.
The fee increases seem to have worked. The MMI fund now stands at positive $5 billion, and plans to increase the fund to its congressionally mandated amount equal to 2% of its loan portfolio by 2016.
Thanks to the FHA MMI fund’s new trajectory, FHA determined it was time to shift the pendulum away from increasing FHA assets and toward easier access to the program.
Will Reduced FHA Premiums Apply to the FHA Streamline Refinance?
One major barrier to FHA loan holders taking advantage of the FHA streamline was the possibility of incurring higher MIP. While refinance rates keep hitting lows, refinancing might not pencil out for borrowers whose current monthly mortgage insurance costs are lower than levels available today.
For instance, a homeowner who opened a $250,000 FHA loan in May 2010 has monthly MIP of 0.55%. But if they refinanced, their loan, their new MIP would jump to 1.35% or $160 per month. Their refinance rate would have to be low enough to compensate.
Lower MIP premiums would mean this borrower’s mortgage insurance would only jump to 0.85%, an increase of $60 per month. At today’s rates, the slightly higher MIP is easily compensated by incredibly low rates.
Some homeowners won’t face the issue at all. FHA loans opened prior to June 1, 2009 qualify for a reduced monthly premium of 0.55% when they refinance. They will see little or no increase, and possibly a decrease in their MIP.
Refinance shoppers also have to consider that today’s FHA mortgage insurance is permanent. FHA loans with less than a 10% down payment opened after April 2013 must pay FHA MIP for the life of the loan.
That’s why some FHA homeowners choose to cancel FHA MIP with a conventional refinance. Conventional loans require private mortgage insurance only when equity is less than 20%, and even then the PMI drops off when the homeowner pays down the mortgage.
The drawback to a conventional refinance is a more time consuming process and harder qualification. Borrowers must document their income, assets, and the home’s current value. The FHA streamline program requires no appraisal or income documentation. Lower MIP will spur more FHA homeowners to apply for the simpler loan option.
FHA Rates Approaching Lowest-Ever Levels
Recent FHA rates have plummeted. Freddie Mac reports that average rates are below 4% to start 2015. FHA rates are even lower than the national average. The Freddie Mac survey polls lenders on their best conventional rates.
FHA rates are lower than conventional rates due to a stronger government backing.
Today’s homebuyer or refinancing homeowner has a great opportunity to lock in low rates and lower FHA MIP costs.
Tim Lucas (NMLS #118763), Editor
Tim Lucas is a licensed loan officer with over 12 years of experience as a loan originator, processor, and team manager. Get a live rate quote for your home purchase or refinance at MyMortgageInsider. Visit Tim on Google+, Twitter, and Facebook.