It looks like the FHA is set to raise their Mortgage Insurance “MI” payments again on buyers! HUD Secretary Shaun Donovan told a Congressional hearing on “Perspectives on the health of the FHA single family insurance fund” this past week that The FHA may need to raise its MI premiums again to shore up its finances. Considering this is how they signaled the last two MI hikes, this is information that buyers should know about so they can make an informed decision about purchasing a home. This will be the 3rd time the FHA have increased their monthly MI payments in just the past 18 months, and each of the last MI hikes were the same as increasing a buyers interest rate by .5%.
The FHA’s finances are in bad shape
So why would the FHA increase their current “MI” premiums on new buyers considering the delicate state the housing market is currently in? The FHA’s reserve funds are depleting fast and are not in good shape right now! Take a look at the chart below.
The FHA is mandated by Congress to maintain a minimum balance (the ratio of economic value to insurance-in-force) in the Fund of 2%. You can see they are currently at .125%, so out of the 100% reserve funds that they are required to have, they only have 12.5% of these reserves available! The FHA said that if housing prices take a tumble next year for some reason, they may need a bailout to shore up their finances. This leads me to believe they’ll have no choice but to raise their monthly MI soon to shore up their finances, we just don’t know when.
How high will the FHA raise the monthly MI again?
Back in 2010, the FHA already got permission from congress that passed a law allowing the FHA to raise their monthly MI % up to a maximum of 1.5% depending on the status of their finances. (their current MI premium percentage is at 1.15%). So lets look at how much the last 2 FHA MI payment hikes over the past 18 months increased a buyers payment. Lets use a $350k mortgage as an example.
*Prior to any hikes, the FHA MI monthly payment % was .55% of the loan amount. = $160 a month
*1st hike 18 months ago increased it to .85% =$247 a month
*2nd hike 12 months ago it increased it to 1.15% = $335 a month
So the FHA mortgage insurance payment for buyers more than doubled in just the past 18 months. I would venture to say they will increase this to the maximum allowed amount of 1.5%, so on a $350k mortgage this will increase a buyers monthly payment another $102 a month.
Compare monthly savings by purchasing now vs waiting for FHA MI increase
Lets compare the monthly payment for a buyer purchasing a home today using FHA’s current MI % of 1.15% versus an increase to 1.5%, so buyers know how much their payment will increase. We will use a $350k loan as an example.
Buying Today
$350k loan
P&I payment at 3.875% is $1650
Say taxes and insurance are another $350 monthly
Today’s MI % of 1.15% ($350k/1.15%) = $335 a month
Total PITI = $2335
Wait 6 months to Buy and MI Increases
$350k loan
P&I payment at 3.875% is $1650
Say taxes and insurance are another $350 monthly
FHA MI % increases to 1.5% ($350k/1.5%) = $437 a month
Total PITI = $2437
*As you can see above, with the FHA MI increasing from 1.15% to 1.5%, the buyers payment has increased $102 a month, which is the same as an interest hike of .5% for the buyer.
It’s another reason to buy now
This potential MI increase by the FHA is information that all buyers should know about asap, so they can decide if it is worth committing to moving forward to purchase now, just in case the FHA does increase their MI requirements soon. It is the oldest trick in the book for government agencies to come out and signal to the market via the media any impending changes they are going to make to any programs.
As I explained to a few buyers I was talking to this morning, by moving forward and committing to buying now, you are taking out an insurance policy on your preferred monthly mortgage budget payment that you are currently happy with, because if the FHA does increase their MI, your overall monthly mortgage payment increases too. Because everyday we take out Auto, health and business equipment insurance etc just in case something unforeseen happens, buyers can do the same thing right now by taking out an insurance policy on their preferred monthly mortgage payment by committing to moving forward and purchasing now.
If you have any questions in regards to FHA MI, please feel free to contact me directly at 858-200-9602. I look forward to chatting soon.
