Is The FHA Moving Toward 1% Up-Front Insurance Premiums?
Is the up-front insurance charge for FHA mortgages going to fall?
FHA-backed mortgages are now a huge part of the financing landscape, but since April the up-front mortgage insurance premium has been 2.25 percent for most FHA borrowers. Now there’s some discussion regarding the idea of a 1 percent up-front MIP — but a higher annual MIP, a charge that would go from .55 percent now to .90 percent for most FHA borrowers.
A revised MIP schedule would lower the cash needed to close an FHA mortgage — but increase monthly cash costs.
It seems difficult to imagine that the up-front mortgage insurance premium (MIP) will soon be reduced given the rising claims and payouts faced by all mortgage insurance plans, including the FHA. That said, such a reduction is not outside the realm of possibility.
How do we know? It’s what the FHA is telling Congress. No less important, the math favoring such a change is entirely plausible.
Speaking before the Senate Appropriations Subcommittee on Transportation, Housing and Urban Development, and Related Agencies last week, FHA Commissioner David H. Stevens said that “while HUD is moving to increase the upfront premium to 225 basis points we are ultimately planning to reduce that premium to 100 basis points, offset by a proposed increase in the annual premium to 85 basis points for loans with loan-to-value ratios (LTV) up to and including 95 percent and to 90 basis points for LTVs above 95 percent.”
Back-Loading Fees
The FHA mortgage program has to have premium money for reserves so it can pay lender claims in case borrowers default. At the same time the FHA wants to get more people into homeownership. One of the best ways to make homes more affordable is to reduce up-front costs. In the case of the FHA mortgage program that’s done by requiring 3.5 percent down instead of the 5 percent to 20 percent required for most other mortgages– but the down payment is not the whole story. There are also costs for closing and that pesky up-front mortgage insurance premium which was raised from 1.5 percent to 2.25 percent as of April 5th.
HUD has moved to cut financing costs by $700 per transaction through the use of its new good faith estimate and HUD-1 forms. If it also can cut the FHA up-front MIP the settlement savings per transaction would be significant.
More Marketplace Volume
The move toward lower up-front costs could make it easier for first-time buyers to enter the marketplace. That’s important because the National Association of Realtors says first-timers represent 40 percent of all purchasers. You need first-time buyers so owners can sell current residences and purchase replacement properties. At the same time, the FHA reserves would actually grow over time. Here’s why.
The FHA has both an up-front mortgage insurance premium AND an annual mortgage insurance premium. The annual MIP is now .55 percent of the loan balance for most borrowers. If the annual mortgage insurance premium is raised from .55 percent to .90 percent then the FHA will see an increase in premium revenue that looks like this:
A home is sold for $300,000. the FHA loan amount is $289.500. In year one, if the annual MIP is .55 percent, the borrower is paying roughly $1,592.25 per year or $132.69 per month for FHA insurance. If the annual MIP is raised to .90 percent the monthly payment will be $217.13 ($2,605.50 divided by 12). The annual increase is $1,013.25 in year one. (All numbers are approximate because the loan balance is reduced each month as a result of amortization.)
The up-front MIP in our example was reduced from 2.25 percent to 1 percent. In this example the cash required at closing fell from $6,513.75 to $2,895 — a difference of $3,618.75. If the FHA will now collect an extra $1,013.25 in the first year of the loan and it will only take about 3.6 years to bring in as much cash as the old system.
Affordability
While the idea of a lower up-front insurance premium for FHA borrowers is attractive, not all loan applicants would benefit. Although a smaller up-front MIP would encourage homeownership, the new and higher annual MIP would make homes less affordable. Buyers would need more income to qualify for financing because monthly costs under the new plan would be higher. The tougher affordability standard would off-set some of the increased volume represented by lower up-front costs, a consideration not to be ignored.
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Comment by Wade on 20 May 2010:
The issue that is missed here is that a high percentage on FHA borrowers finance the UFMIP and don’t pay it out of pocket. The change to the lower UFMIP cuts FHA’s risk somewhat, by lowering the actual LTV. The increase in the Annual MIP will actually net FHA more money faster.
Comment by EMELLIE ANDERSON on 9 September 2010:
I CANNOT SEE ANY BENEFITS FOR THE HOMEBUYERS IN THE REDUCTION OF UPFRONT MIP AND INCREASE OF THE ANNUAL PREMIUM. IT MAKES IT A LOT MORE DIFFICULT FOR SOME ONE TO QUALIFY. AT LEAST WITH THE UPFRONT MIP IT COULD BE PAID IN FULL BY THE SELLER OR LENDER ALLOWING THE BORROWER TO QUALIFY IF RATIOS WERE TWO HIGH. BUT WITH THE INCREASE IN PITI THEY STAND NO CHANCE.