Mortgages

FHA Loans to Get More Expensive

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FHA Loans to Get More ExpensiveBig changes are in store for borrowers with Federal Housing Administration mortgages, as well as those who have been hoping to take advantage of the FHA program’s lower down payment options. FHA Commissioner Carol Galante has announced a series of changes to bolster the program’s financial health, but it will mean extra costs for most borrowers.

The main changes that will affect new borrowers — and some who refinance — are higher monthly mortgage insurance premiums that will now last for the life of the loan.

FHA mortgage programs are popular due to their more lenient down payment and qualifying guidelines. The major “trade-off” versus conventional mortgages lies in the area of mortgage insurance.

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Free Credit Check ToolThe mortgage insurance premium (MIP) is basically an extra charge that borrowers pay each month as insurance in case they default. MIP will increase for most new mortgages by 10 basis points. A basis point is 1/100th of a percent, which means a 10 basis point increase equals a rate increase of .10 percent. The rate for jumbo mortgages ($625,500+) will go up by 5 basis points or 0.05 percent.

That may not sound like a lot, but it is on top of a previous increase. In April 2012, the highest mortgage insurance premium on FHA mortgages rose to 125 basis points from 115 basis points, dramatically higher than the 55 basis points charged until October 2010. Now it will rise to 135 basis points.

Essentially this is like adding an extra 1.35 percent to the interest rate that borrowers using an FHA mortgage are required to pay, compared to someone who does not have to pay mortgage insurance.

For example: 135 basis points on a $200,000 mortgage is $225 per month. In a high-cost area like California, it would mean $562.50 added to the monthly cost of a $500,000 loan. See how much this increase can cost you here.

But where it really adds up is over the life of the loan, and that’s changing too.

Under previous rules in effect since 2001, the FHA automatically canceled MIP on loans when the outstanding principal balance reached 78 percent of the original loan balance. Under the new rules, FHA remains responsible for insuring 100 percent of the outstanding loan balance throughout the entire life of the loan, and that means homeowners will pay for this premium until the loan is paid off or refinanced with another loan. MIP can cost borrowers tens of thousands of dollars over the life of a 30-year loan.

[Related Article: 3 Loans That Are Tough to Refinance]

This loan program has been very popular for borrowers who haven’t saved for large down payments, or who have decent, but not always stellar, credit scores. (That includes borrowers who haven’t established a strong credit history, not just those with blemishes.) That should continue, though the FHA is demanding greater scrutiny of loan applications with credit scores below 620 and debt-to-income ratios of 43 percent or higher, as well as loans to those who have been through foreclosure in the past few years.

What can you do with this news? The FHA has announced that the lifelong MIP requirement will be effective for loans with case numbers assigned on or after June 3, 2013 while the increase in MIP will be effective for loans with case numbers on or after April 1, 2013. Joe Kelly, president of Arcloan.com, warns that you need to act quickly if you want to take advantage of the current program requirements. He advises:

  • If you have an existing FHA loan, find out whether you can refinance now and secure a lower rate without the higher MIP that may apply. (Certain FHA loans, in particular the Enhanced Streamline Refinance, will not be affected by this change.) Lenders expect to be very busy once homeowners realize they may have a limited time to take advantage of the current MIP rates.
  • If you are buying a home and hope to take advantage of the current FHA program, get your application in as soon as possible. Again, mortgage companies were slammed when the Home Affordable Refinance Program 2.0 was announced, and the same is likely to happen when prospective homeowners realize what’s happening.
  • Consider all your options. Work with a knowledgeable loan officer to determine if there are better loan options for you than an FHA loan. “While other loans may require you to pay for private mortgage insurance (PMI), the amounts charged can be significantly less — as much as 60 percent less per month,” says Kelly. “And unlike the new FHA, you may be able to cancel traditional private mortgage insurance when your loan balance declines or your equity in your home increases.”

Even with these changes, the FHA program will still be around to help certain borrowers. But for those hoping to take advantage of the FHA mortgage program, acting sooner rather than later could mean significant benefits. The government has raised the insurance premiums on these loans four times since 2010, and there is no telling how high they can go.

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  • kat

    hello, i have an FHA loan that was taken out 12/2011 and we pay the MIP….if i understood correctly we are in the clear meaning we wont be having to pay for the entire life of the loan?? only until about 8 or so years into the loan?? or how does that work? i was thinking to refi but i think its way too soon. interest is 4.25%. any advice would be helpful!!

    • Gerri Detweiler

      Hi Kat –

      I checked with Joseph Kelly, the mortgage professional I interviewed for my article. He said: “You are correct. The upcoming change for FHA mortgages which will keep the MIP in place for the life of the loan does NOT go into effect until June of this year. It will be for NEW loans with FHA case numbers assigned after June 3, 2013.
      On FHA mortgages in place before that date the MIP stays in effect until the loan balance falls to 78% Loan to Value or a minimum of five years. The other big change that is being made on FHA loans goes into effect in April on new FHA mortgages. That will be raising the monthly MIP rate from 1.25%/yr to 1.35%/yr..

      If your current rate is 4.25% I would strongly encourage you to speak with a lender you trust (we’d be happy to to help you at YouCanRefi.com) to see if it would be of value to you to refinance now before these changes go into effect. You might be able to drop your rate 1/4% to 1/2% with No Closing Costs and save additionally on your monthly payment.”

      I have to agree with Joe on this one, Kat. It is not too early to refinance if it saves you money and you can do so without closing costs. The other thing to keep in mind is that if rates you go up you may not have this opportunity again.

  • Nickib

    Is this new law JUST for FHA loans, or for all loans? We are in the process of trying to purchase a home, while at the same time trying to sell ours to get into a new home. My credit is on the upswing, but certainly not “stellar” and his is good, but he needs my income to help the debt to income ratio. Our new real estate agent told us tonight that we must be pre-qualified AND have an accepted offer in on a property PRIOR to June 3, 2013 if we want to avoid this new PMI law. I just want to make sure that this is ONLY for FHA loans and not conventional loans also. Thanks.

    • Gerri Detweiler

      Yes, this only applies to FHA loans, not to conventional loans.

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