For the seventh time in 5 years, the Federal Housing Administration (FHA) is raising its mortgage insurance premium (MIP) schedule for FHA-insured borrowers.
Beginning April 1, 2013 -- 39 days from now -- some FHA-backed homeowners will pay as much as 1.55 percent for annual FHA mortgage insurance, and will pay the FHA MIP for the life of their loan. For others, FHA mortgage insurance terms won't change.
Here's a quick breakdown of the changes ahead.
The Federal Housing Administration is an insurer of mortgage loans, and its portfolio has increased dramatically since last decade.
In 2006, the FHA insured fewer than 4 percent of all purchase-money mortgages. By 2010, that figure swelled to close to 20 percent. Unfortunately, however, the market share gained by the FHA was off less-than-high quality loans.
There were two reasons why.
First, when the market for second mortgages dried up,
buyers lost access to the 80/20 financing that allowed for a zero-downpayment
mortgage. The shift left the FHA's 3.5% downpayment program as the lowest
low-downpayment mortgage program for buyers, resulting in buyers flocking to it. U.S.
Not surprisingly, low downpayments correlate highly with foreclosure and default.
Second, when conventional mortgage backers Fannie Mae and Freddie Mac began to add risk-based pricing to their home loans via loan-level pricing adjustments -- raising rates and fees on applicants with FICO scores under 740, for example -- by comparison, the FHA's available mortgage rates were suddenly amazingly low for all "non-prime" borrowers.
Again, not surprisingly, low FICO scores also correlate highly with foreclosure and default.
Shortly thereafter, the rate at which FHA loans went into default increased, which forced the FHA to pay more insurance claims than it had expected. The group was forced to pay claims at such a furious pace that its reserves fund dwindling.
By 2010, the FHA's Mutual Mortgage Insurance (MMI) account had dropped below $2 for every $100 insured, which was a violation of the agency's congressional mandate. Through 2011, the losses continued and, in 2012, the FHA's most recent audit showed the group with negative $1.44 for every $100 insured.
The FHA must rebuild its reserves by law, and this is why the FHA MIP schedule is changing.
The New 2013 FHA MIP Schedule
FHA-insured homeowners pay mortgage insurance in two parts.
The first part is called "upfront mortgage insurance" (UFMIP) and it's a one-time payment that is made at closing. UFMIP is traditionally added to your loan size, and is not used in loan-to-value (LTV) calculations for an FHA loan.
The second part of FHA mortgage insurance is known as the annual mortgage insurance premium (MIP). Annual MIP is paid monthly as part of your regular mortgage payment. On a mortgage statement, MIP is sometimes itemized as "HUD ESCROW".
Unlike upfront mortgage insurance premiums, annual MIP payments vary based on your loan term, your loan-to-value, and your loan size.
Refinance An Existing FHA Mortgage From Before June 1, 2009
The FHA rewards its long-time customers with low MIP rates.
If your current FHA-insured mortgage pre-dates June 1, 2009, the FHA will allow to you use the FHA Streamline Refinance program and not require you to pay the new, higher MIP rates.
For these "grandfathered" loans, the UFMIP charged is equal to 0.01% of your loan size, or $10 for every $100,000 borrowed. This amount is added to your loan balance at the time of closing.
The annual mortgage insurance premium schedule for such "old loans" is similarly low :
- 15-year fixed rate mortgage with loan-to-value of 78% or less : No annual MIP required
- 15-year fixed rate mortgage with loan-to-value greater than 78% : 0.55% annual MIP
- 30-year fixed rate mortgage, all loan-to-values: 0.55% annual MIP
Note : These special mortgage insurance rates apply to FHA refinances only. This may include the FHA Streamline Refinance, or a credit-qualifying FHA refinance. By definition, purchases will not qualify for the grandfathered rates because they are not replacing an FHA-insured loan which pre-dates June 1, 2009.
All FHA Purchases, And Refinances Of An Existing FHA Mortgage From After June 1, 2009
For new FHA purchase loans, and for refinances of an FHA-backed mortgage from on, or after, June 1, 2009, the federal agency applies a different series of mortgage insurance premiums.
First, the FHA will continue to assess an upfront mortgage insurance premium of 1.75% of the loan size for all new borrowers, or $1,750 for every $100,000 borrowed. This is the same rate at which the FHA currently assesses UFMIP.
Annual mortgage insurance rates, however, are changing.
The annual MIP schedule for newer FHA mortgage varies based on three loan traits : (1) Loan-to-value, (2) Loan term, and (3) Loan size. The annual MIP schedule is as follows :
- 15-year loan term, LTV less than, or equal to, 78 percent : 0.45% annually
- 15-year loan term, LTV greater than 78 percent, less than 90 percent : 0.45% annually
- 15-year loan term, LTV greater than 90 percent : 0.70% annually
- 30-year loan term, LTV less than, or equal to, 95 percent : 1.30% annually
- 30-year loan term, LTV greater than 95 percent : 1.35% annually
Loan terms of 15 years or fewer require an extra 0.25 percentage points of annual MIP. Loan terms of more than 15 years, including the 30-year fixed rate mortgage, are subject to a 0.20 percentage point increase.
The new annual MIP rates go into effect for all new FHA loans, beginning April 1, 2013 with the exception of the 15-year loan term with loan-to-value of seventy-eight percent or less. For this lone combination, the new rate goes into effect June 3, 2013.
In addition, the FHA is changing its policy which allows for MIP cancellation.
Currently, the FHA cancels MIP for homeowners who have paid mortgage insurance for at least 5 years on a 30-year fixed rate loan, and whose loan size is less than 78% of the lower of a home's original purchase price or appraised value.
Beginning in June, the FHA will remove annual MIP after 11 years for homeowners whose starting LTV is 90% or less. For everyone else, including those making a 3.5% downpayment, the FHA will assess MIP for the duration of the loan's term.