FHA MORTGAGE INSURANCE PREMIUMS TO CHANGE STARTING IN OCTOBER

On Aug. 13th President Obama signed H.R. 5981, which allows the Department of Housing and Urban Development more flexibility in raising the mortgage insurance premiums for certain loans insured by the FHA. FHA announced that beginning with loans originated after Oct. 4, there will be two major changes to the FHA Mortgage Insurance program.

The monthly mortgage insurance factor will be increased from .50% - .55% to .85% - .90%. They will also be decreasing the Up Front Mortgage Insurance Premium from 2.25% to 1.00% of the loan amount.How do these changes affect a FHA buyer starting in October?

Using a $500,000 mortgage as an example, the upfront MIP would go from $11,250 to $5,000, resulting in an immediate savings of $6,250. However, the monthly MI would go from $229 to $375 per month. The borrower would see an increase of $130/month. For a borrower who is stretching to qualify, this increase can have an impact on qualifying.

On average, the decrease in purchasing power for a FHA borrower under the new rules is about 3.25%. So, the borrower who could qualify for a home valued at $575,000 can now only qualify for a home valued at $555,000.

This change could also have an impact on borrowers wanting to take advantage of the FHA Streamline refinance program. The new increase in the monthly MI will make it more difficult to achieve the minimum net tangible benefit (5% drop in payment) as required by FHA.

Even with all these changes FHA remains the loan of preference for borrowers with a down payment of less than 5%. Those borrowers should expect the FHA to continue to refine the guidelines that will have an impact on the loan amount that borrower's can qualify for.