FHA to Raise Mortgage Insurance Premium, Require Payment for Life of the Loan
Via a press release on January 30, 2013, Federal Housing Administration (FHA) announced a series of changes to it’s loan program that would make it more expensive for borrowers. This is part of the broad effort to bolster FHA’s Mutual Mortgage Insurance (MMI) fund, which has been dwindling in the past 2 years.
“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said FHA Commissioner, Carol Galante.
Let’s look at the most important changes:
Mortgage Insurance Premium Goes Up
In last six months, FHA has increased mortgage insurance premiums twice. They will be doing so again. Annual mortgage insurance premium (MIP) for most new mortgages will increase by 10 basis points or by 0.10 percent. FHA will increase premiums on jumbo mortgages ($625,500 or larger) by 5 basis points or 0.05 percent. Currently, the maximum MIP for loan amounts under $625,500 is 1.25 percent and for loan amounts greater than $625,500 it is 1.50 percent.
For a $300,000 loan amount, this change will increase monthly payment by $25 a month. For a $700,000 loan amount, this change will increase monthly payment by $29 a month.
Mortgage Insurance Cancellation Not Allowed
Currently, borrowers who have FHA loans can discontinue paying MIP if their loan balance reaches 78% of home value, provided they had paid MIP for at least five years. FHA will require most FHA borrowers to continue paying annual premiums for the life of their mortgage loan. FHA had this rule before, but starting in 2001 they allowed cancellation of MIP.
FHA insures 100 percent of the loan against default for the life of the loan, hence they thought its only logical that they should ask the borrowers to pay the MIP for the full term. What this means for borrowers is that the only way they will ever get rid of MIP is by refinancing into Conventional mortgages.
Raising Downpayment for Jumbo Loans
The minimum downpayment on loan amounts over $625,500 will be increased from 3.5 percent to 5 percent.
The MIP increase will be effective with case numbers assigned on or after April, 1, 2013. The prolonging of mortgage insurance cancellation will be effective with case numbers assigned on or after June 3, 2013. The effective date for increase in down payment for jumbo mortgages hasn’t been decided yet. Case numbers are usually assigned within a day or two of loan application. If you are considering an FHA loan program, its advisable that you start your loan application prior to that date. Note that a property address is required to assign an FHA case number. This way you will be eligible for current FHA MIP rate and you would still be able to cancel your mortgage insurance.