HUD is making some long awaited changes to the cost of FHA mortgage insurance. These changes are definitely for the better, & will bring reductions to the monthly mortgage payment for folks that obtain an FHA mortgage after this change is made.
When a homebuyer obtains an FHA mortgage, they pay mortgage insurance to HUD to protect the lender against default. This is similar to PMI on a conventional loan. The FHA mortgage insurance is paid in two fashions: first an “up front” lump sum payment is made, & this amount is typically rolled into the mortgage. For a standard FHA mortgage, this amount is equal to 1.75% of the loan amount. So on a $100,000 mortgage, the homebuyer actually borrows $101,750, & that extra $1,750 is sent right to HUD upon closing. This amount is NOT being changed. In addition to the up front payment, there is also a monthly payment due for mortgage insurance, & it is this monthly amount that is being reduced. The reduction will definitely be noticeable. On that same $100,000 mortgage, the monthly mortgage insurance premium (MIP) is currently $112.50 per month. After the reduction, which is slated to go into effect at the end of January, the monthly amount will go down to $70.84. This is about a 37% reduction, & will certainly make an FHA loan a more attractive option.
Interestingly, this announcement is coming on the heels of a recent announcement by FNMA & FHLMC indicating that minimum down payments on conventional loans will be reduced to 3% from 5%. This down payment reduction on conventional loans will definitely cut into FHA’s business.
Washington is touting this on social media as a catalyst that will bring more homebuyers into the market due to “easier qualifying”. While this reduction in MIP premium is definitely a welcome & overdue change, I think it remains to be seen how many “additional buyers” it will bring to the market. The “easier qualifying” is based upon the mathematical reduction in payment. To give some perspective, let’s assume that a homebuyer is seeking to qualify for that same $100,000 mortgage noted above. Assuming typical rates, taxes & debt load, that homebuyer will currently need to earn about $38,200 per year to qualify. After the MIP reduction, that same homebuyer would need to earn about $37,000 to qualify. While the needle certainly points in the right direction for “easier qualifying”, I think you would agree that the qualifying income requirement difference is not huge.
Having said all of this, this is still great news for our business. It is a very valid reason to make phone calls to those “on the fence” prospects, especially those that are payment sensitive & must use FHA financing to qualify. It is an opportunity to be that “industry expert” that buyers rely on to make a home buying decision.
As noted earlier, HUD is slated to put this into effect at the end of this month. I do hope that they can attain that goal, so that the change is in place for the spring home buying season. As you might expect, there is a fair amount of “trickle down” that needs to happen before this can become a “live change”. As details emerge, I will keep you posted via this blog.
Here is a link to HUD’s website where the official press release can be found: http://portal.hud.gov/hudportal/HUD?src=/press/press_releases_media_advisories/2015/HUDNo_15-001 .
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