New lending rules are coming down the pipe for future homeowners applying for an FHA-insured loan. Effective Monday, FHA monthly mortgage insurance premiums (MIPs) will be increasing on new loans while the upfront mortgage insurance fee is decreasing. Richard Weiner, regional area manager for Envoy Mortgage in Bethesda, explains what it all means.
What are the numbers behind the changes?
The upfront mortgage insurance premium is being reduced from 2.25 percent to 1 percent. The 2.25 percent was just too expensive upfront. And the five-year, monthly premium is increasing from [0.5 or 0.55 percent] to 0.8 or 0.9 percent, depending on the down payment.
What does that mean for homebuyers?
The adjustment to loan amount is the borrower will be borrowing, one-and-a-quarter percent less. On a typical $250,000 loan they would be borrowing $3,125 less. But now they’re paying a higher monthly insurance … about a $50 increase per month. So the net effect [over 5 years] is the FHA getting another $1,250 from each loan.
Why is the FHA making these changes?
Foreclosures have depleted their fund. The FHA did this as way of strengthening their reserves in anticipation of losses in future years. They are simply looking to change the format to increase their reserves.
What about FHA borrowers who want to take advantage of the lower interest rates and refinance?
The refinancing rules require that the borrower receive at least a 5 percent reduction in overall payments. So now even with the reduced upfront mortgage premium … monthly payments have gone up so much that an additional $50 on a $250,000 loan makes it difficult to qualify for a refinance.
Will borrowers now shy away from FHA loans?
It will not under any circumstances scare them away because you can still finance 96.5 percent. And that money is just not available on the private side right now. – Liz Farmer
