FHA Mortgage Insurance Premiums for Life?
FHA is primarily an insurer of home loans originated by its approved lenders based on its lending guidelines. By law, It needs to maintain a minimum of 2% reserve in its Mutual Mortgage Insurance (MMI) Fund to tide over losses due to defaults.
The rapid increase in the number of loans it insures and the accompanying losses, the MMI fund currently has a negative 1.44% in its reserves. Basically, the losses it suffered due to loan defaults are much greater than the premiums it collects for its reserve fund. In a bid to shore up its reserves, FHA has planned to increase the mortgage insurance premiums it collects.
According to the newly issued guidelines by FHA which come into effect from June 03, 2013, annual mortgage insurance must be paid for the life of the loan on all new FHA-insured mortgages that exceed a Loan-to-Value (LTV) of 90% at the time of loan approval. If the starting LTV is 90% or less, the annual MIP must be paid for 11 years.
Before the new underwriting change, FHA borrowers were only required to pay monthly mortgage insurance only till they reach an LTV of 78% based on the original loan balance. From now onwards, FHA will no longer allow the cancellation of the MIP during the entirety of an insured loan.
This is one of the most significant changes to FHA MIP guidelines, considering that the vast majority of borrowers seeking FHA loans make minimal down payment. Moreover, for certain FHA programs, no annual mortgage insurance was required before, only upfront mortgage insurance premium was needed.
The 2012 Lending data shows that FHA lenders originated a total of $233 billion in FHA-insured loans, an increase of 22% over 2011. The huge surge seen in the number of originations for FHA-insured loans in the recent years was primarily due to the agency’s flexible underwriting requirements, low interest rates and reasonable insurance premiums. This new change coupled with the premium increases made in April, make FHA loan programs a lot less attractive than the conventional mortgages.
Typically, PMI payments on a conventional mortgage last for about 10 years for loans with an LTV above 80%, or till the equity in the home exceeds 20%. With the newly introduced FHA MIP changes, the FHA borrowers will end up paying annual insurance premium for a period of 30 years.
Even if the FHA loan carries a lower interest rate when compared to a conventional home loan, the rise in mortgage insurance premiums will negate any such savings.
Borrowers who primarily shop for a home loan based on the interest rate should pay special attention to the effect that insurance premiums will have on their long term mortgage payments.
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