FHA Mortgage Insurance Changes- How this will Impact You!


FHA issued a notice yesterday that it will make some fairly substantial changes to both the Upfront and Monthly mortgage insurance premiums (MIP) that it charges to FHA borrowers.
FHA lending has become the lifeline for both the lending industry and the real estate industry over the last 2 years. Because of its lower downpayment requirements and more generous qualifying ratios, the amount of FHA loans has surged during that time. With that increase in loans, FHA has taken on additional financial risk and exposure, and these new changes are an effort by FHA to reduce that excess risk.
FHA loans normally require two types of mortgage insurance for each loan: an “Up Front Mortgage Insurance Premium” (UFMIP) that is charged at the time the loan is taken out, as well as a monthly Mortgage Insurance Premium (MIP) that is added to the monthly mortgage payments. The UFMIP has historically been a fairly large fee, but one that the borrower could roll into their loan so that they would not have to increase their out-of-pocket expenses, with very little effect on their monthly payment; the MIP, on the other hand, was smaller in absolute terms but had more of an impact on the borrower’s monthly payments.
You may remember, that on April 1, 2010, the UFMIP was raised from 1.75% of the borrowed amount to 2.25% of the borrowed amount. And the monthly was slightly increased to .55%.
Effective September 7, 2010, FHA’s new requirement will actually reduce the UFMIP to even less than it was previously–down to 1.00% of the borrowed amount for most loans. That reduction will for most FHA borrowers reduce their monthly payment by about $6/mo for every $100,000 of their loan (assuming the current interest rates).
However, FHA is at the same time imposing a significant increase in the monthly MIP, from an “MI factor” of .55%, to an MI factor of .90%. Each MI factor percentage increase of 1% corresponds to an increase in the borrower’s monthly payment of roughly $0.83 per $100,000 of the loan. (Unlike w/ UFMIP, the MIP’s effect on monthly payment is independent of interest rates). Therefore, with the MIP nearly doubling because of this increase, the borrower’s monthly payment, due to the changes to MIP, will increase about $29/mo for every $100,000 loan amount.
The net result of these two changes is that borrowers will see their monthly payments go up by roughly $23/mo for every $100,000 of money borrowed. For our area, that would mean a typical borrower with a $200k loan, would have to pay about $50 more for their FHA loan. That’s not that big of a deal, especially with today’s historically low interest rates, however, it still will lower the number of people that will be able to qualify for loans and/or afford the properties that they wanted to purchase.
These new changes should go into effect starting with all FHA loans w/ casefile numbers issued on or after September 7th, 2010.

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