FHA Mortgage Insurance Changes Coming

In the last couple of weeks, Congress has passed
HR 5981. This bill gives FHA the ability to adjust
its annual mortgage insurance premiums (MIP).
The target for the new changes is September 7,
2010.

Currently, FHA MIP is comprised of two com-
ponents, part of which is an upfront MIP that
costs 2.25% of the loan amount. Most borrowers
choose to add this upfront MIP to their base loan,
rather than come up with thousands in cash at closing.

The other portion of the MIP is the monthly
portion. It currently costs .50% to .55% per
year, payable in monthly installments.

These mortgage insurance premiums are
required on all FHA loans, with few exceptions.
It is the way that the FHA program accrues
the funds necessary to pay for the losses
incurred under the FHA program. When a
loan goes into default, FHA has to pay a claim
to the lender for their losses.

It will probably not be a surprise to learn that
the losses experienced by the FHA-insured
loans are higher than the money coming in to
pay the claims. Recalculating the way that
mortgage insurance is collected has become
necessary to keep the FHA program afloat.

So, HR 5981 is planning to adjust its MIP
premiums as follows:

The upfront MIP will drop from 2.25% to
1.00% of the loan amount. This fee will still
be allowed to be financed on top of the base
loan amount.

The monthly premium will now increase based
on an annual calculation of .85% to .90% per
year. The expected additional funds to be
received for the FHA insurance fund is calcu-
lated to be $300 million per month.

The effect of this will be to make qualifying for
the new FHA loan more difficult.

On a loan amount of $300,000, the expected
increase in monthly premium will be approxi-
mately $87.00 per month. Based on an interest
rate of 4.5%, this means that a borrower may
qualify for $17,000 less in loan amount.

As the housing market continues to struggle
to gain some stability, we continue to seek ways
to help borrowers qualify for their home loans.

Although this allows FHA an opportunity to get
more healthy, and to make the quality of their
insured loans less risky (because the borrowers
need to be stronger to qualify for the same
loan amounts as before), it does come at a price.

Fewer borrowers will be able to qualify, many
of which are first-time buyers. The first-time
buyers are the fuel that allow existing homeowners
to move up in purchase price and generate growth
in the real estate sector.

Be sure to consult with an experienced professional
(like me) to explore options in qualifying for your
next home loan.