FHA Mortgage Insurance to remain on loans FOREVER

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HUD has announced in their Annual Report to Congress Regarding Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2012, their plan to revise the cancellation of FHA mortgage insurance premiums. This is set to go in effect on new FHA insured mortgages sometime in 2013. 

From HUD’s report:

Under a policy change made in 2001, FHA has been cancelling required mortgage insurance premiums (MIPs) on loans for which the outstanding principal balance reaches less than 78% of the original principal balance. However, FHA remains responsible for insuring 100% of the unpaid principal balance of a loan for the entire life of the loan, such loan life often extending far beyond the cessation of the MIP payments. As written, the timing of MIP cancellation is directly tied to the contract mortgage rate, not the actual loan LTV. The current policy was put in place at a time when it was assumed that home price values would not decline, but today we know that LTV measured by appraised value in a declining market can mean that the actual LTVs are far lower than amortized mortgage LTV, resulting in higher losses for FHA on defaulted loans. Analyses conducted by FHA’s Office of Risk Management projects lost revenue by approximately $10 billion in the 2010-2012 vintages as a result of the current cancellation policy. The same analyses also suggest that 10%-12% of all claims losses will occur after MIP cancellation. Therefore, beginning with new loans endorsed after the policy change becomes effective later in FY 2013, FHA will once again collect premiums on FHA loans for the entire period during which they are insured, permitting FHA to retain significant revenue that is currently being forfeited prematurely.

With FHA running out of funds, they are having to take measures to protect this mortgage program. You can also expect to see mortgage insurance premiums (upfront and annual) to increase in addition to FHA mortgage premiums remaining on the life of the loan. 

What does this impact you?

If you currently have an FHA mortgage, your mortgage insurance premium that you pay monthly is still set to drop off (cancel) once your principal balance reaches 78% of the loan to value and a minimum of 60 mortgage payments have been made. 

However, if you currently have an FHA mortgage in the mid-to-high 4% range and you have been considering an FHA streamlined refinance, you need to act quickly

If you are considering buying a home and you are planning on using FHA for financing, be prepared to have the FHA mortgage insurance remain on the loan until you either sell the home or can refinance to  a conventional mortgage.

If you are interested in buying or refinancing a home anywhere in Washington state, I’m happy to help you!

Comments

  1. wow, if true, just like USDA loans now.

  2. I’m looking to refi in Ga. Great info. Thanks. I hope its possible to refi by 1/1/2013. I only have about 10 days left.

  3. It’s 1/10/2013 if I start a streamline refinance right now how long does it take for HUD to endorse the new loan or does it work some other way on a refinance I wouldn’t want to start the process and close then this take effect locking me into a life of MI.

    • Excellent question! We don’t know how long it will take for HUD to endorse a loan. It could be weeks or longer after closing. I am anticipating that HUD will come out with a Mortgagee Letter soon with more details as to when they will start this.

  4. Thanks for the quick reply, so even if I close and sign before this takes effect my terms for the MI could change if it endorses weeks later? Again thank you for these great informative articles.

Trackbacks

  1. [...] week I shared with you part of HUD's plan to no longer allow FHA mortgage insurance premiums to terminate to help improve their financial stability. This would be effective for loans guaranteed by HUD in [...]

  2. [...] NOTE: FHA guidelines for mortgage insurance is changing in 2013. Please check current [...]

  3. [...] **UPDATE 12/19/2012: FHA mortgage insurance will not be cancelled on new mortgages effective January 2013. It will remain on the life of the loan (until it is paid off or refinanced to a non-FHA mortgage).** Read more here. [...]

  4. [...] FHA annual mortgage insurance will remain on the mortgage for the life of the loan. This is the mortgage insurance that is paid monthly. Once this goes into effect, home owners will need to either refinance to a non-FHA loan or pay it off to no longer have mortgage insurance.  [...]

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