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%.