On August 12, 2010, the President signed into law a bill that authorizes HUD to increase the annual mortgage insurance premiums for FHA loans, effective October 4, 2010.
For those unfamiliar with FHA loans, the mortgage insurance on these loans is divided into two types:
1) The Up-Front Mortgage Insurance premium (UFMIP) collected at closing and normally financed into the loan, and,
2) The annual mortgage insurance premium which is collected as part of your monthly mortgage payment.
HUD has always had the authority to change the UFMIP and has done so regularly, but they needed special approval by Congress to change the annual premium. The President’s signature finalized the approval HUD had requested.
FHA survives based on the mortgage insurance it collects. This is not a tax increase of any sort. FHA needed to do something to increase its reserves. However, given the role FHA plays in the housing industry, especially for lower-income buyers and entry-level housing, the proposed changes (which go into effect on October 4) will make it harder for future borrowers to qualify for FHA loans. At the very least, FHA mortgages will be more expensive.
Currently the UFMIP on FHA loans is 2.25% while the annual premium for 30-year fixed mortgages with less than 5% down payment is 0.55%. Effective for new loans after October 4, 2010 (loans with FHA case numbers assigned after this date), the UFMIP will be lowered to 1%, while the corresponding annual premium will increase to 0.90%. I have broken it down here:
| Monthly Mortgage Payment Comparison | ||
| Current | After October 4 | |
| Base loan amount | $ 100,000 | $ 100,000 |
| Total loan amount | $ 102,250 | $ 101,000 |
| Principal & Interest (PI) | $ 548.90 | $ 542.19 |
| Mortgage Insurance (MI) | $ 45.53 | $ 74.50 |
| PIMI | $ 594.43 | $ 616.69 |
| Difference | $ 22.26 | |
| *5% interest rate used. MI based on rate for 3.5% down payment | ||
The monthly mortgage payment for FHA borrowers will now be 3.75% higher than under the previous premium structure. Since an important qualifying factor for potential borrowers is the ratio of their debt to their gross income, these FHA changes will just make it a little harder to qualify.
Taken another way, the changes will cost the borrower more in the long run. For anyone planning on staying in their home longer than four years, FHA will collect more total mortgage insurance premiums.
| Comparison | |||
| Current | After October 4 | Difference | |
| UFMIP | $ 2,250 | $ 1,000 | $ (1,250) |
| Annual MIP | $ 550 | $ 900 | $ 350 |
The annual MIP is recalculated every year based on the current principal balance, so it will decrease slightly every year until it is cancelled. As you can see though, after four years, the savings from the lower UFMIP percentage is eliminated.
Call Brad Eggers at 847-744-0168 or email at bradley.eggers@ardain.com to obtain your own FHA loan pre-approval.
[...] On Monday, February 14, Valentine’s Day, a day of romance and love, FHA expressed very little love to prospective homeowners. You may remember that last August, President Obama signed into law a bill authorizing HUD to increase the annual mortgage insurance premiums for FHA loans an entire one percent. At that time, HUD elected to only raise the annual premiums for 30 year fixed mortgages by 0.35% while at the same time lowering the up-front fee to 1%, as detailed in Mortgagee Letter 10-28. I wrote about this change in my article, “FHA Changes Effective October 4.” [...]