For the second time this year, the FHA is changing its mortgage insurance policies.
Beginning in days, some FHA loans will require FHA MIP for so long as the loan is active. Many more will require MIP for as many as 11 years.
This is a stark change from today’s FHA policy which allows for FHA mortgage insurance cancellation after just 5 years.
What Is An FHA Mortgage?
An FHA mortgage is a mortgage which is insured by the Federal Housing Administration (FHA), a self-supporting agency within the U.S. government.
FHA-insured mortgages are comparable to mortgages you may seek from other sources, including conventional loans via Fannie Mae or Freddie Mac; VA loans via the Department of Veterans Affairs; or, USDA loans from the U.S. Department of Agriculture.
For example :
- FHA loans are available in various lengths (e.g.; 30 years, 20 years, 15 years)
- FHA loans are available as fixed-rate mortgages, or adjustable-rate mortgages
- FHA loans can be made with full cost, low-closing cost, or zero-closing cost options
What makes an FHA-insured mortgage different, though, is its guidelines; the set of minimum standards which mortgages must meet.
For a mortgage underwriter, FHA guidelines are a checkbox-like system for loan approval, covering such loan traits as minimum downpayment percentage, minimum allowable credit score, borrower employment history and borrower monthly gross income.
When a mortgage underwriter reviews an FHA loan application, he’s actually just verifying loan data against the agency’s printed minimum requirements. Each checkbox “checked” is one step closer to approval.
Also different from other loan types, the FHA mortgage rates offered by banks are born from the market price of a Ginnie Mae mortgage-backed bond and, for most of the last 12 months, Ginnie Mae bonds have outperformed other mortgage-backed bonds.
FHA mortgage rates have dropped faster, and farther, than comparable conventional mortgage rates available via Fannie Mae and Freddie Mac. It’s one reason why Federal Housing Administration-insured mortgages are used in roughly 1-in-5 purchases today, up from 1-in-20 in 2006.
Soon, though, FHA loans will be less economical.
A policy change will raise the cost of Federal Housing Administration mortgages for all new FHA-insured homeowners. Those that wait to buy or refinance will raise their long-term loan costs significantly.
FHA Mortgage Insurance Premiums : How It Works
The Federal Housing Administration is an insurer of mortgages and, like all insurers, it collects premiums. FHA premiums are more commonly called “mortgage insurance premiums” (MIP) and they’re paid in two fashions.
First, the FHA assesses a 1.75% upfront mortgage insurance premium (UFMIP) at the time of closing. The amount is financed one-time only, and can be for homeowners who choose to use the FHA Streamline Refinance program.
The second type of mortgage insurance is known as annual MIP. Annual MIP is calculated once per year, then paid in twelve installments. Annual MIP rates vary by loan term and loan-to-value (LTV) :
- 15-year loan terms with loan-to-value over 90% : 0.70 percent annual MIP
- 15-year loan terms with loan-to-value under 90% : 0.45 percent annual MIP
- 30-year loan terms with loan-to-value over 95% : 1.35 percent annual MIP
- 30-year loan terms with loan-to-value under 95% : 1.30 percent annual MIP
Then, for FHA-insured mortgages for which the base loan balance exceeds $625,500, an additional assessment applies. Loans with a 15-year term or less add +0.25% in annual MIP, and loans with a term between 16-30 years add +0.20% to annual MIP.
All FHA premiums are paid into the agency’s Mutual Mortgage Insurance (MMI) Fund, the fund from which all default claims are paid.
Unfortunately for today’s FHA mortgage applicants, that fund is short on cash.
By law, the Federal Housing Administration must maintain a certain, minimum level of funds in the MMI Fund — $2 for every $100 insured. As of its most recent audit, though, the FHA held negative $1.44 for every $100 insured.
So, like homeowners insurance company blindsided by a natural disaster, the FHA has been forced to change its rules. To get the best FHA-insured deals possible, get your loan going before the end of this month.
Beginning June 3, 2013 FHA premiums are going to get more costly.
June 3, 2013 : FHA MIP Changes Again
The Federal Housing Administration has made 6 changes to its mortgage insurance premiums in the last 6 years. Each has increased the short-term cost of using FHA-backed mortgages. The agency’s next change, however, will change its long-term costs.
Beginning June 3, 2013, the FHA will change its long-standing Annual MIP Cancellation Policy. Certain homeowners will lose their right to cancel the annual MIP. FHA MIP will be perpetual.
Here’s what’s changing.
Currently, the Federal Housing Administration requires homeowners to pay annual MIP so long as their loan-to-value is greater than 78%, where “value” is equal to the last known value of the home.
In addition, if the original mortgage term is greater than 15 years, at least 60 payments must have been made on the mortgage before FHA MIP can be automatically cancelled.
Beginning in June, though, the FHA moves away from an LTV-based system. The new cancellation policy will be as follows :
- Loans beginning at 90% LTV or less will pay annual MIP for 11 years.
- Loans beginning at 90% LTV or more will pay annual MIP for the complete loan term.
This means that home buyers using the Federal Housing Administration’s 3.5 percent downpayment program will pay annual mortgage insurance for the loan’s full 30 years, regardless of whether the home appreciates to the point of having 22 percent equity or more.
With the new FHA rules, MIP is forever.
Get Your FHA Case Number Today
It’s easy to protect yourself from the new insurance rules — get an FHA Case Number prior to June 3, 2013 and you’ll have protection you need while your loan is in-process.
Even if your closing date is after June 3, 2013 on the calendar, with a valid FHA Case Number prior to that date, you’ll be grandfathered in to today’s more favorable MIP policies. So, get your FHA loan underway today.
Get your rates and your FHA Case Number online. It’s fast and free today.