The FHA Mortgage Insurance Premium Conundrum
We’re now well into the first quarter of 2017, and Mortgage Insurance Premiums (MIP) are changing for FHA Loans. We’ve seen a change of administrations as the new replaces the old and sometimes the replacement doesn’t seem all that enthusiastic about fading into the sunset. If you’ve applied for an FHA loan recently you’re probably aware of what’s going on but if you’ve yet to turn in your FHA loan application, let’s take some time to explain.
2 Types of Mortgage Insurance for FHA Loans
FHA loans carry two types of mortgage insurance. Mortgage insurance is in fact an insurance policy and when used in conjunction with an FHA loan, should the loan ever go into default the lender is compensated for the loss. There is an upfront mortgage insurance premium of 1.75% of the loan amount and is rolled into the final loan. There is also an annual premium paid in monthly installments and it’s this premium that has taken center stage. At least in the mortgage world.
On January 9th of this year, then President Obama asked the Department of Housing and Urban Development to reduce the annual FHA premium to take effect January 27, 2017, one week after President Trump takes office. This reduction for FHA loans with a 3.5% minimum down payment the annual premium was to fall from 0.85 basis points to 0.60 basis points. One basis point is 1/100th of one percent. While that doesn’t sound like very much, it does have an impact on a borrower’s total monthly payments.
Changes in Mortgage Insurance Premiums
The annual MIP is paid in monthly installments and based upon the outstanding loan balance. For a $200,000 loan, 0.85 basis points is equivalent to $1,700 per year, or $141 per month. The planned reduction to 0.60 basis points would have provided an annual premium of $1,200 or $100 per month for a difference of $41. That’s not a great amount but $1,200 per year adds up.
How Does This Affect my FHA Loan?
The new administration sent out executive orders halting the implementation of any pending legislation or bureaucratic changes upon further review. This announcement was made January 20th. This included the planned MIP rate cut. January 27th came and went and the annual MIP reduction never happened. However, that doesn’t necessarily mean it won’t. Note the new edict did not cancel the proposed reduction but halted it. When will the reduction come? Will it?
It’s more than likely it will. The FHA has minimum capital reserve requirements and it’s incumbent upon HUD to determine the rate decrease won’t negatively affect reserves to the point it falls below the minimum, we can expect the cut to come. Again, while the rate decrease is a drop of 25% from the previous rate it shouldn’t stop anyone from buying and financing a home using the FHA loan and really the reversal only impacted those who applied for an FHA loan between January 9 and January 20. If you have any questions about the annual premium or FHA loans in general, it’s time to speak with me.