Yesterday I was interviewed by Alan Zibel with the Associated Press about the passage of House’s FHA Reform bill which, among other things, would increase the annual FHA mortgage insurance premium. The Senate still needs to pass their version of the bill but there is no doubt in my mind that we are going to see FHA loans become more expensive for consumers. Congress is wanting this bill in order to “improve the financial safety and soundness of the FHA mortgage insurance program”.
HR 5702, or ”FHA Reform Act of 2010″, gives HUD the power to triple the current annual FHA mortgage insurance premium (which is paid monthly). HUD will offset this cost by reducing the upfront mortgage insurance premium which was increased to 2.25% in April of this year. HUD will offset the increase in the annual monthly mortgage payment by reducing the annual premium to 1.00%. HUD feels this is helping home owners increase their home equity by 1.25% since a majority of FHA borrowers finance the upfront mortgage insurance premium.
Currently, the annual mortgage insurance premium for an FHA loan with 3.5% down payment is 0.55% (if you’re putting down 5% or more, the premium is slightly reduced to 0.5%). HR 5702 will allow HUD to increase the annual premium up to 1.55%. To calculate how much this would impact your monthly mortgage payment, take the loan amount and multiply the annual premium; then divide by 12 months.
This is how upfront (UFMIP) and annual mortgage insurance pencils out on an FHA insured mortgage today based on a loan amount of $300,000 and an estimated rate of 5.00% (this morning’s rate is much lower). Since we’re dealing with future figures, I thought 5 was a nice round number for comparison sake.
- 2.25% UFMIP x 300,000 = $6,750 = principal & interest payment (UFMIP + loan amount) = $1,646.70
- 0.55% annual MIP x 300,000 = $1,650 divided by 12 months = $137.50
- PIMI (principal, interest & mortgage insurance) payment: $1,646.70 + $137.50 = $1,784.20
HR 5702 would allow HUD to almost triple the annual premium while reducing the UFMIP. Worse case scenario, it could look like this based on the same criteria in my last example:
- 1.000% UFMIP x 300,000 = $3,000 = principal & interest payment = $1,626.57.
- 1.55% annual MIP x 300,000 = $4,650/12 months = $387.50
- PIMI payment = $1,626.57 + $387.50 = $2,014.07
A increase in payment of $229.87 for the same loan even with the reduced upfront mortgage insurance premium! Based on using an interest rate of 5%, $229.87 per month equals $42,800 in loan amount–meaning that if the borrower only qualified for the PIMI of $1784.20; their loan amount (borrowing power) has been reduced by $42,800.
According to Alan Zibel of the Associated Press, the annual mortgage insurance premium will start off at a lower 0.9%:
FHA officials want to raise that fee to 0.9 percent, though the bill would give them the power to hike it as high as 1.5 percent.
Even with the annual premium at 0.9%, the monthly mortgage payment (PIMI) would increase to $1,851.57. (300,000 x 0.9% = 2,700/12 = $225 monthly mortgage insurance plus 1% UFMIP payment of $1,626.57). This would increase the payment by $67.37 per month based on my example.
Based on HUD Commissioner David Steven’s testimony in March, their goal is to be “more in line with GSE and private mortgage insurers’ pricing”.
Often times, I’ve recommend FHA loans over conventional mortgages requiring private mortgage insurance because even though FHA has annual and upfront mortgage insurance, the pricing and overall payment has been lower (plus many FHA loans are presently assumable).
In my opinion, making FHA more like a conventional mortgage will impact many borrowers for the worse and delay the recovery in the housing market further.
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