New FHA Mortgage Insurance Premiums (MIP) Announced

The FHA has once again, for the 7th time in the past 5 years, has  announced that they are raising their rates on mortgage insurance premiums.

The changes are set to kick in on April 1, 2013. This means that if you are to take out an FHA loan after April 1st, you will be subject to pay up to 1.55 percent for annual FHA mortgage insurance premiums. If you get to closing on your FHA mortgage prior to the April 1st deadline, you will not be subject to these changes.

Needed Injection of Revenue

Over the past month, it’s been in the news that the FHA is in some major trouble. The problem comes from it’s lenient terms under in which a mortgage can be insured by the government backed insurer. Back in 2006, the Federal Housing Administration only insured only 4 percent of all mortgages in the United States. Now in 2012, the number has grown to over 20 percent.

There are a couple of reason why:

1) Once the house of cards came crashing down and mortgages were to blame, the mortgage industry tightened it’s belt so much so that it was next to impossible to qualify for a second mortgage. In turn, borrowers lost the ability acquire 80/20 financing  to obtain a new home with no money down. FHA with it’s low down payment of only 3.5% was the next best available option.

Statistics prove that with low down-payments, there is a greater risk with mortgage defaults and foreclosures.

2) Freddie Me and Freddie Mac started to increase their rates and fees on borrowers with credit scores under 740. If you didn’t make the cut, it’s a wise move to go with an FHA insured mortgage to take advantage of their much lower interest rates.

Lower credit scores also contribute to mortgage defaults and foreclosures.

With riskier lower down-payments, lower credit scores, along with the growing amount of insured mortgages, the FHA started to struggle with the amount of insurance claims it had to payout causing the insurers’ reserves to go into the red. As with any other insurance company, government backed or not, they are having to raise their rates.

New FHA MIP Schedule For 2013

There are two different payments that an FHA insured borrower has to pay:

1) (UFMIP) Upfront Mortgage Insurance: This is a one-time payment and it’s made when you close on your FHA insured home mortgage.

2) (MIP) Mortgage Insurance Premium: This insurance payment is paid annually and can be escrowed into your monthly payment upon the borrowers’ choosing.

If You Refinance An Existing Mortgage That Was Funded Prior To June 1, 2009

The Federal Housing Administration will allow current borrowers to use their Streamline Refinance product and they will not require you to pay the higher new MIP rates. 

If this is your scenario, then your one-time upfront mortgage insurance payment would be $10 for every $100k borrowed. So take for instance,  if you were a FHA insured borrower in Louisville, Kentucky and you borrowed $350,000, your upfront one-time payment would be $35, which again would be due at closing.

You also get a break from the new Mortgage Insurance Premiums:

  • 15-year streamline refinance; LTV of 78% or less : No annual MIP required
  • 15-year streamline refinance; LTV greater than 78% : 0.55% annual MIP
  • 30-year streamline refinance; all LTV: 0.55% annual MIP

In our scenario of the FHA insured borrower in Louisville, Kentucky, his monthly mortgage insurance would cost $160.41. I calculated 0.55% of the principle of his mortgage and divided by 12 months.

FHA Rules Regarding Purchases and Refinances Post June 1, 2009

If you closed on a new FHA purchase, or refinance mortgage post June 1, 2009, you are required to pay the new mortgage insurance premiums.

With the new FHA mortgage insurance changes that are set to go into affect April 1, 2013, here is what to expect:

  • 15-year loan term, LTV less than, or equal to, 78 percent : 0.45% annually
  • 15-year loan term, LTV greater than 78 percent, less than 90 percent : 0.45% annually
  • 15-year loan term, LTV greater than 90 percent : 0.70% annually
  • 30-year loan term, LTV less than, or equal to, 95 percent : 1.30% annually
  • 30-year loan term, LTV greater than 95 percent : 1.35% annually

If your mortgage’s principal is $625,500, you will be required to pay more in mortgage insurance premiums than stated above but no more than 0.25%.

FHA Mortgages vs Conventional Mortgages

While conventional and FHA (Federal Housing Association) mortgages have some similarities, there are distinct differences between the two and it is important for anyone who is considering taking out a mortgage to understand the differences in order to borrow in a way that best suits their specific financial and home buying needs.

Conventional Mortgages

A conventional mortgage is defined as any type of mortgage that is not insured by the Federal Government. Conventional mortgages are offered by credit unions, banks, and mortgage companies and brokers. The largest secondary market organizations that offer conventional mortgages are Freddie Mac and Fannie May. Conventional mortgages will usually require a down payment of around 20 %, but in today’s real estate and mortgage market, there are programs that may allow for a lower down payment if the borrower meets certain qualifying criteria.

With conventional mortgages, borrowers that are allowed a lower down payment are required to pay private mortgage insurance, also known as PMI. Once their loan-to-value amount is under 80%, they are no longer required to pay PMI insurance. It sounds complicated, but it is actually quite simple, as the LTV can decrease as the mortgage is paid down, as well as if the value of the home increases during the length of the loan. Conventional mortgages also take a borrower’s credit very seriously. In today’s market, if a credit score has blemishes or considered a possible risk, their application could be turned down.

FHA Mortgages

The FHA is not a direct lender, so their terms and conditions differ as far as credit and insurance. They insure FHA- approved lenders, and they are very specific about their terms. They take a classic approach to lending and they do not offer boutique loans. FHA-approved lenders are restricted to offering fixed rate loans, and the adjustable rate mortgages that they do offer are very conservative, which allows home buyers to easily understand their mortgage terms and manage their payments and insurance accordingly. For the first five years of an FHA loan, the borrower is charged an insurance premium that is added to their monthly payment. This payment is required until the borrower’s LTV decreases by at least 78%.

The down payment required for an FHA mortgage can be as low as 3.5 %, and the lenders also make their final lending decision using the “old fashioned” standards. Credit is still a consideration, but an FHA lender will also consider employment and rental payment history as part of the borrower’s profile. They will also give the borrower a chance to explain why their credit score may be less than satisfactory. FHA lenders consider the whole package, and this can be very helpful for first time home buyers, as well as anyone who may have experienced a run of bad luck due to the troubled economy.

Making an Informed Decision

While conventional and FHA loans both offer reasonable terms, it is ultimately up to the borrower to decide on the best type of mortgage to suit their specific needs. Buying a home is a big step, and it is important for borrowers to be educated on their options before signing on the dotted line. First time home buyers may benefit by consulting with a financial expert who can advise them on the various specifics of the two mortgage programs, and it may also be helpful to consult with a knowledgeable real estate agent or broker. By taking the time to weigh out the differences, home buyers can make an informed decision on their borrowing options.