The FHA has just been given the green light by congress to increase the cost of the monthly mortgage insurance on all FHA loans for new buyers. Right now, depending on your LTV (loan to value), the FHA monthly mortgage insurance Premium (MIP) is either .50% or .55% of the base loan amount, under this new law the cap has been raised to 1.5%.
The House of Representatives approved by a 406-4 vote the Federal Housing Administration Act, a law designed to shore up the finances of the agency which now guarantees nearly one-third of the nation’s mortgages. The new law gives FHA the authority it had requested to raise the ceiling on the annual premiums it charges borrowers for its guarantee.
FHA’s 2 step process to shore up finances
Earlier this year the FHA announced its intention to raise its premiums in a two-step process that was part of a larger program to put itself back on a firm financial footing. This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing.
The first step was raising the up-front premiums due from the borrower at loan closing, this became effective April 9, 2010 when upfront premiums went from 1.75 percent to 2.25 percent. However, the FHA was not able to raise the monthly mortgage insurance (MIP) without the permission of Congress as it was already at the authorized ceiling. Now under the law passed the agency will be allowed to increase its annual premium to 1.50 percent of the unpaid balance of the loan.
What can new buyers expect?
However FHA Commissioner David Stevens has come out and said the agency does not plan on raising rates to the maximum limit when this bill becomes law. Instead, the agency wants to raise the fee for new borrowers from 0.55 to 0.9 percent, Stevens said. The increase would help the FHA raise capital as well as make its fee structure more consistent with that of the private mortgage insurers, which have been crowded out as FHA’s market share has exploded (see chart below).
Comparing current vs new mortgage insurance payments
Lets take a look at how this increase in monthly MIP will effect overall mortgage payments and affordability for new buyers. Lets look at FHA Monthly Mortgage Insurance Premiums (with less than 5% down).
Current premium - .55% monthly
Expected increased premium - .90% monthly
Maximum increased premium - 1.55% monthly
On a $400k loan for example, the monthly insurance amount with the current premium (.55%) is $183 a month. On the new “Expected” increased premium of .90%, this same buyer will pay $300 a month for mortgage insurance, which is an increase of $117 a month. $117 a month is a lot of money for some people and will make that $400k home purchase more expensive and possibly out of range now for many new buyers. This will also increase debt to income ratios, as this will be an additional debt of $117 to plug into a buyers debts.
Lets hope they do not enforce the limit up to the cap of 1.5%, as this will increase payments by $317 a month on a $400k loan. This will not be a wise move by the FHA as this will decrease the price even more for what a buyer can afford. But as we have seen many times in the recent past, the people in congress do not make the wisest decisions most of the time…I will say no more on this subject.
Will FHA change their debt to income rules soon too?
Another important point to make is that the FHA have not lowered their debt to income ratios down to 50% yet. Fannie Mae and Freddie Mac have capped their debt to income ratios at 45% and allow 50% for strong borrowers. I will be very surprised if the FHA does not do this sometime soon, so that the whole lending industry has a cap of 50% debt to income ratios for all loans. If and when they do this, this will also limit the qualified pool of buyers who can buy at certain prices now.
A good idea would be to explain this future increase in mortgage insurance premiums to any buyers who are still unsure about buying now. Show them the difference in payments with the current mortgage insurance and with the new future increased mortgage premium, an increase of $117 a month just might be enough to get some buyers off the fence to buy now.
Most of CA First Time Credit Claimed
I just read an article this morning CA Tax Credit that says California ’s Franchise Tax Board is warning consumers that nearly 80% of the state’s $100 million first-time buyer credit has been claimed. As of June 15, the agency has received more than 15,000 applications from consumers. However, since many are duplicates or invalid, FTB will accept at least 28,000 applications to ensure the entire $100 million allocation is spent. It will announce a cut-off date for the program on its website, giving at least 24 hours notice for applicants to fax in their documentation.
However, submission before the deadline does not guarantee consumers being approved for the credit. FTB will stop allocating credits once the $100 million is exhausted. A separate program, the $100 million tax credit for the purchase of a newly constructed home, is still operational. Consumers need to enter into contract before Jan. 1, 2011 and complete the purchase before Aug. 1, 2011. This is another great reason to create urgency with buyers who may have thought this tax credit would be around for a while.
This entry was posted
on Friday, June 25th, 2010 at 5:49 pm and is filed under FHA Set to Raise Monthly Mortgage Insurance Premiums For New Buyers.
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