Change is a comin’!
In a recent release from the U.S. Department of Housing and Urban Development,, the subject line sums it up: “Revision of FHA policies concerning cancellation of the annual Mortgage Insurance Premium (MIP) and increase to the annual MIP“.
The intention of these changes is to continue to strengthen the Mutual Mortgage Insurance Fund. To sum it up, there are 2 parts to the change that will affect consumers.
Part 1: FHA Mortgage Insurance Premium Changes
The FHA is an insurer of mortgage loans and, by law, it is required to maintain a 2% reserve in its Mutual Mortgage Insurance (MMI) fund. Currently, because of bad loans made last decade, the FHA’s reserves are -1.44 percent.
In an effort to rebuild the MMI, therefore, the Federal Housing Administration has planned some changes — chief among them, an increase in annual mortgage insurance premiums on most FHA-backed mortgages.
New MIP Began April 1, 2013 (no joke)
As of April 1, 2013, most FHA-backed mortgages will be subject to an MIP increase of 10 basis points annually, or 0.10 percentage points. The increase applies to all loan terms, including 15-year fixed-rate FHA loans.
In addition, insurance premiums for jumbo FHA loans will change, too.
Loans with terms of between fifteen and 30 years will be adjusted higher by 5 basis points annually, or 0.05 percentage points, to a the maximum 1.55% annual MIP rate as allowed by law.
The MIP increase will not affect FHA Streamline Refinances which replace FHA loans from before June 1, 2009.
Part 2: New FHA MIP Cancelation Policy Begins June 3, 2013
The Federal Housing Administration also made a second MIP-related announcement — the agency is reversing its policy which allows FHA-backed homeowners to cancel mortgage insurance premiums once the outstanding principal balance of an FHA loan reaches 78 percent of the original balance.
Going forward, the FHA will disallow the removal of MIP throughout the life of a loan, if the loan’s starting loan balance is higher than 90% of its appraised value. This is true for purchases and refinances.
For loans in which the loan-to-value begins at 90 percent or less, mortgage insurance premiums must be paid for 11 years. This change goes into effect June 3, 2013.
Other Changes To FHA Loans
In addition, the FHA will now require lenders to manually underwrite loans in cases in which borrowers have credit scores lower than 620 and total debt-to-income ratios higher than 43 percent. In these instances, lender must also document any factors that support approving the loan.
Furthermore, the Federal Housing Administration will announce higher down payment requirements for jumbo FHA loans, increasing the minimum from 3.5 percent to 5 percent or more.
The good news is that FHA mortgages — although more restrictive — remain among the best “deals” for both low-downpayment buyers and current homeowners with FHA-backed loans.
We realize that some of this terminology may be somewhat confusing. We are always available to answer any questions you may have. Click here to submit a question via email.