FHA mortgage insurance isn’t going anywhere
Ben Carson recently announced that there won’t be any changes to FHA mortgage insurance in 2020.
That’s either good news or bad, depending on how you look at it.
The bad news? Your FHA mortgage insurance premium won’t be going down — or going away — any time soon.
But the good news is premiums won’t be going up, either.
As long as insurance costs stay level, borrowers can still get FHA financing on attractive terms.
Want to see if you qualify for a home loan with a low down payment and flexible credit requirements? Check your FHA eligibility today.
FHA mortgage insurance news for 2020
In a recent interview with HousingWire, HUD Secretary Ben Carson said he expects FHA insurance premiums to remain steady during the coming year.
There’s a lot to unpack in that statement. But here are the basics:
The FHA insures mortgage loans. To provide financial protection for lenders, FHA keeps a reserve of cash on hand that can be used to cover mortgage defaults when necessary.
Previously, the FHA was targeting 2% in that reserve fund — it wanted cash reserves equal to 2% of the total loan amount it ensures.
Now, Carson says, the FHA wants at least 4-6% in its reserve fund before it will consider any changes to mortgage insurance rules for borrowers.
That means new FHA borrowers in 2020 will have to follow the same mortgage insurance premium rules as current borrowers.
Current FHA mortgage insurance premiums
Most FHA borrowers pay an upfront mortgage insurance premium (MIP) fee equal to 1.75% of the mortgage amount.
But some borrowers decide not to pay the upfront MIP in cash. Instead, it can be added to the loan balance.
In addition to the upfront MIP deposit, most FHA borrowers pay an annual mortgage insurance premium (annual MIP) equal to 0.85% of the loan amount.
Here’s an example of how the upfront and annual MIP costs would add up for an FHA loan on a $250,000 house.
- Home sale price: $250,000
- Down payment: 3.5% or $8,750
- Initial loan amount: $241,250 for a 30-year loan
- Upfront MIP cost: $4,200 (1.75% of loan amount)
- Annual MIP cost: $174 per month or $2,100 per year (0.85% of loan amount*)
*Annual MIP cost assumes the initial MIP cost was rolled into the loan balance, making the overall loan amount $245,450
You can use our FHA calculator to work out the numbers on your own home financing.
FHA mortgage insurance over the life of the loan
It’s not easy to get rid of FHA mortgage insurance once you have it.
If you got a 30-year loan and put less than 10% down on the home, you’ll be stuck paying FHA mortgage insurance premium all 30 years.
That is, unless you refinance into a conventional loan once you hit at least 20% equity.
FHA loans for which you completed an application after June 3, 2013
|Loan Term||Original Down Payment||MIP Duration|
|20, 25, 30 years||Less than 10%||Life of loan|
|20, 25, 30 years||More than 10%||11 years|
|15 years or less||Less than 10%||Life of loan|
|15 years or less||More than 10%||11 years|
That means most FHA borrowers will continue paying annual MIP charges for as long as the loan is outstanding.
By comparison, with most conventional loans, mortgage insurance will end once the loan balance is reduced to 78% of the original amount.
A lot of borrowers don’t like paying FHA mortgage insurance, which is understandable. Not only is it an added monthly cost, but the insurance protects the lender — not the person paying for it.
But FHA mortgage insurance is important to lenders. It lets them feel secure about making new home loans for people who don’t have an “ideal” down payment or credit score.
The role of FHA mortgage insurance
Remember, the FHA doesn’t actually fund your home loan. Instead, it insures your home loan.
FHA mortgages make homeownership possible for people that might not qualify with any other program. That includes people with limited cash for a down payment or a sub-par credit score.
Benefits of FHA mortgages:
- Make a down payment as little as 3.5% of the home’s value
- Buy with a credit score starting at 580
- Buy with a credit score as low as 500 if you can make at least a 10% down payment
Those benefits are great for borrowers — especially first-time home buyers.
But to a lender, minimal cash reserves and low credit are considered “risky.” That’s where FHA mortgage insurance premium (MIP) comes in.
If an FHA mortgage goes into foreclosure, the FHA assures that the lender will not suffer a loss. The program offers 100% insurance for lenders. It is because of this protection that lenders are willing to make FHA-backed loans with so little down.
Without FHA mortgage insurance, it would be a lot harder for people to buy homes with less than 20% down or sub-optimal credit.
How could the FHA mortgage insurance program change?
It’s possible that FHA requirements could change despite Carson’s no-change pledge. Congress might pass legislation revising the program. Also, HUD might be forced to make certain changes.
But even if the FHA’s lending rules change, homeowners should not expect to see their mortgage insurance premiums drop off.
A more likely route would be for the FHA to loosen up its mortgage lending standards. That could potentially mean more flexible credit requirements or even less money down.
Why FHA mortgage rules might change
The FHA program has a fundamental problem. It insures a variety of loans — but not all of them are profitable.
In fiscal year 2018 the FHA loan program made plenty of money. FHA’s forward loan portfolio has a positive net worth of $46 billion.
But the FHA also has a reverse mortgage program. It offers "home equity conversion mortgages" or HECMs. And that program is bleeding money. In fiscal year 2018 the HECM portfolio had a net worth of negative $13 billion.
So, if the FHA decides to change its rules, it would likely loosen up restrictions on mortgage lending — to boost its more profitable product — and double down on HECM rules to prevent further losses.
But, as Carson says, none of these changes are likely in 2020. So if you’re hoping to ditch your FHA mortgage insurance premium, you’ll have to go another route.
What can you do to get rid of FHA annual MIP costs?
FHA doesn’t plan to change its lending rules next year. But just because the FHA wants you to pay mortgage insurance premiums for 30 years doesn’t mean you have to.
There are legitimate ways to get out of paying FHA MIP if you qualify:
- Refinance with a conventional mortgage once you have at least 20% equity
- Refinance with a loan program that does not require private mortgage insurance. In such cases the lender self-insures, often by charging a somewhat higher interest rate
As always, make sure the numbers are in your favor before deciding to refinance.
Can your monthly savings pay refinancing costs within 36 months? If yes then refinancing might make sense. If not, refinancing might not be for you.
Get rid of MIP with a refinance
To find out if you could refinance and stop paying MIP, connect with a mortgage lender and get pre-approved.
A pre-approval can tell you what’s affordable in today’s market and whether refinancing will help you get ahead.
Get started with the link below to see if you’re eligible to refinance out of your FHA loan and into a loan without mortgage insurance.