FHA issued a press release yesterday officially announcing upcoming changes to their mortgage program. Below are the 2 key changes that will be the most relevant for buyers and sellers. At this time, they have not indicated an official date for the changes to go into effect, but I would expect it would be within the next couple of months. I will update you all once we have official timelines.
FHA will increase its annual mortgage insurance premium (MIP) for most new mortgages by 10 basis points or by 0.10 percent
This will raise the factor for the monthly premium from 1.25% to 1.35%. The formula for calculating the monthly payment isLoan Amount x .0135 / 12
Here are examples of how this will affect monthly payments:
$200,000 Purchase Price….Added Monthly Cost =$16.09
$300,000 Purchase Price….Added Monthly Cost =$24.13
$400,000 Purchase Price….Added Monthly Cost =$32.17
FHA will also require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan
In my opinion, this is the bigger change, as it will add enormous cost to borrowers over the life of the loan.
Commencing in 2001, FHA cancelled required MIP on loans when the outstanding principal balance reached 78 percent of the original principal balance. However,
FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, a term which often extends far beyond the
cessation of these MIP payments.
Based on current 30 Year Fixed FHA rates of 3.25%, a borrower would be at a 78% loan to value which would make them eligible to have their monthly mortgage insurance dropped after 108 months. Based on this new change, the monthly mortgage insurance would be required for the full 360 month term of the loan.
Here are some examples of the added cost:
$200,000 Purchase Price….Added Cost Over the Life of the Loan:$54,714.24
$300,000 Purchase Price….Added Cost Over the Life of the Loan:$82,071.36
$400,000 Purchase Price….Added Cost Over the Life of the Loan:$109,431.00
As soon as I know the effective date for these changes I will let you know. In the meantime, I would suggest educating your buyers and sellers about these changes.
FHA buyers will obviously be looking at higher payments and added long term costs once the changes go into effect which could price them out of their desired price range.
Sellers will be faced with a smaller pool of buyers due to the added costs decreasing affordability for FHA buyers.
As we move forward, Conventional Mortgage Insurance will become more common. At this time, most of the mortgage insurers will allow up to 97% loan to value. The catch is the guidelines and mortgage insurance premiums are much more sensitive to credit scores. In other words, this will be a good alternative to low down payment borrowers with high credit scores, but not as helpful for borrowers with lower scores.
Thank you RL Kyker for the great information.
RL Kyker
Mortgage Consultant
Mortgage Master Inc.
NMLS#225433
Direct: 443-340-6655
E-Fax: 443-321-0549
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