An hour after Donald Trump’s inauguration on January 20, his administration suspended the previous administration’s cut to FHA annual mortgage insurance premiums (AMIP).
Announced on January 9, the rates would have been trimmed 25 basis points (lowering the fees from 0.85% to 0.60%) for FHA-backed loans closing on or after January 27.
The fee cut has not been canceled – merely suspended pending a review by the new administration. It’s possible that the cuts could be reinstated, or that larger cuts could be made.
If you’re a current or prospective FHA home buyer, does it make sense to wait and see what happens?
With housing inventories at historic lows, home prices rising, and the FHA’s fees already lower than they’ve been for years, postponing your purchase could be a costly mistake.
What’s at Stake?
Had the rate cuts remained in place, the Department of Housing and Urban Development (HUD) estimated that the average FHA homeowner would have saved $500 in 2017.
In regions where housing costs are above the national average, savings would have been greater.
While urging the Trump administration to restore the fee reduction, California Association of Realtors (CAR) President Geoff McIntosh said that “Home buyers in California … would have saved an average of $860 a year, [and] will be negatively impacted more than any other state by the decision to not reduce the FHA premium.”
National Association of Realtors (NAR) President William Brown estimated that the reduction would have lowered payments for over 750,000 new homeowners, and would have allowed an additional nearly 50,000 home buyers to qualify for loans.
Despite pleas from realtor groups, HUD officials said the rate cut would remain suspended indefinitely pending “more analysis and research…”
About FHA Mortgage Premiums
The FHA, which is part of HUD, doesn’t issue mortgages itself. Instead, it insures the mortgages issued by private lenders against default.
The program is popular among first-time home buyers and those with lower incomes because they can qualify for mortgages with a downpayment as low as 3.5% and a credit score of just 580.
However, to ensure that the FHA has enough funding to compensate private lenders for defaults, FHA-approved home buyers must purchase two types of insurance, regardless of the size of their downpayments: Upfront Mortgage Insurance and Annual Mortgage Insurance.
The Upfront Mortgage Insurance Premium (UFMIP) is currently calculated at 1.75% of the base loan amount.
In theory, the home buyer must pay the entire UFMIP as a lump sum when the loan is made.
In reality, mortgage lenders usually fold the UFMIP into the loan. This makes the loan amount slightly larger, but it allows the home buyer the financial flexibility to gradually pay it off.
The Annual Mortgage Insurance Premium (AMIP) – the subject the HUD’s interest – is paid in monthly installments each year and is tacked on to the monthly mortgage payment.
At 0.85%, a $400,000 home with a 30-year fixed mortgage has a monthly premium of $283.33. If the rate had been cut to .60%, that figure would have fallen to $200 a month (or $999.96 a year) for the same house.
FHA Fee A Victim Of Politics
For the most part, the changing FHA fee is due to partisan politics.
The cut was approved by the Obama administration in his last days in office, and it was seen as an unrealistic benefit by many Republicans. The lowered payments for people means less security for the FHA.
The fee reduction was mean to signalize a “normalization” of the housing market, and Democrats have decried the new administration’s removal of the fee reduction as an assault on lower-income homeowners.
But Republicans worry that the FHA lacks sufficient cash reserves. Valid arguments can be made for both points of view.
Unfortunately for home buyers, the decision to keep or remove the fee reduction could mean the difference between home buying eligibility and not getting approved.
Those who were planning on purchasing a home through FHA should recognize that while the fee reduction was suspended, current fees are still what they have been for the past few years.
The Cuts May Come Back
Although the administration has suspended the cuts “indefinitely,” there’s reason to believe they will be reinstated.
For one thing, the program has enjoyed lower default rates in recent years, and has met or exceeded the congressionally mandated cash reserve requirement since 2013.
For another, the Trump administration has already set about fulfilling many promises made to working-class supporters, and this is precisely the demographic that will benefit most from a reinstatement of the fee reduction.
President Trump himself complained in a tweet that the U.S. homeownership rate was at a 51-year low of 62.9%. (Not since 1965 has a smaller portion of Americans owned a home.)
There’s perhaps no better way to reinvigorate the homeownership rate than making FHA lending more affordable and more widely available to working-class home buyers.
For these reasons alone, it’s entirely possible that the cuts will be restored or even deepened.
Until that happens, home buyers shouldn’t assume that any fees will be changed.