FHA Mortgage Insurance Premiums to Rise, Again

In the years after the 2008 collapse, the Federal Housing Administration (FHA) has taken on a bigger and bigger role in the mortgage market.  Rather than pull back during the crisis years, the FHA continued to back new mortgages, allowing many borrowers to purchase homes they otherwise would not have found loans for.

The effect on the FHA, though, was less positive.  For several years running, its Mutual Mortgage Insurance (MMI) Fund has lost money as more and more defaults and foreclosures have hit the balance sheet.  The MMI Fund is predicted to have a negative value for the first time ever, spurring aggressive action from the FHA as it tries to recoup its losses.

Last year, the FHA raised mortgage insurance premiums across the board, which many predicted at the time would not be enough to stem the tide.  Now just a year later, the FHA has announced that it will again increase the rates of mortgage insurance and, more importantly, require borrowers to pay for it longer.  The net effect is a dramatic increase in the cost of taking out an FHA loan, which unlike last year’s changes could finally lead borrowers to look at other types of mortgage products.  The new policies will affect any mortgage taken out on or after June 03, 2013.

 

Mortgage Insurance Rate Changes

The most straightforward change for borrowers will be the rise in the rates of mortgage insurance.  For new borrowers, this will mean a simple increase in their monthly payments over those of past borrowers.

The amount of mortgage insurance you’ll need to pay is shown below as a percentage of the total loan balance.  This yearly fee will be divided out equally among all twelve months, giving you a stable payment to make each month.  The annual MIP rate will be determined by the loan amount and the loan to value ratio you had when you originally took out your loan.  It does not matter if your loan amount or your LTV falls past the benchmarks shown below, instead it only matters what they were when you originally took out you loan.

30-Year Loan

 

15-Year Loan

 

Length of Mortgage Insurance Changes

Less obvious, but far more important, the FHA will no longer allow borrowers to cancel their mortgage insurance after they have paid down their loans.  In the past it was it was common for a borrower to get out from under mortgage insurance just five years after taking out their loan.  Under the new policies, an FHA borrower with a high loan to value ratio when they take out their mortgage will have to pay for mortgage insurance over the full length of their loan.  Since the majority of the FHA’s borrowers have such ratios, it’s likely to affect a large percentage of the FHA’s future borrowers.

Similar to the rise in rates, the length of payments will be based on the term of the mortgage and the loan-to-value ratio when the loan is taken out:

 

Since it’s hard to visualize what those numbers mean, we’ll break them down in a graph below that shows the cost of mortgage insurance on a 30 year loan, for $200,000 with the minimum down payment.  As you can see, under the new mortgage insurance schedule, such a borrower will have to pay almost two and a half times what they used to.

 

Other Changes to FHA Mortgages

In addition to creating a new mortgage insurance environment, the FHA is also:

• Tightening credit standards for low credit score borrowers – The FHA now requires lenders to manually review applications from borrowers who have both credit scores below 620 and debt-to-income ratios above 43%. In the past, the FHA allowed lenders to check such borrower’s records using automated systems.  Manual review will add more days onto the process and probably lead to more rejections.
• Raising down payments on jumbo mortgages – the minimum down payment on a jumbo mortgage will rise from 3.5% to 5%.

While unrelated, both of these changes signal the FHA is looking to make its underwriting practices more stringent.  It also suggests which types of policies could change in the future: credit score requirements might go up even more and required down payments could also rise for other FHA mortgages.

 

Conclusion

Even after adding in all the new revenues from these mortgage insurance changes, the FHA is still in for many tough years ahead; a retrenching and toughening of their lending practices should be expected.  For potential borrowers, though, the change to the length of mortgage insurance might be so costly that they eschew FHA mortgages altogether.  Any borrower with options would be wise to explore other loan programs, checking to see if the new cost of mortgage insurance is simply too steep to be worthwhile.   The FHA’s recent changes will undoubtedly lead many potential borrowers to explore other options in search of lower costs.  However, the organization’s low down payment requirements will continue to be a significant draw.  After all, the FHA remains the only game in town for people who can’t put more than 3% down.