FHA Mortgage Insurance Premium Changes

Hey guys! This is a looong post, but a useful one. There's been some changes with FHA loans and this explains it all!

On August 12, 2010 President Obama signed Public Law 111-229, which provides the Secretary of Housing and Urban Development (HUD) with flexibility with regards to the amount of mortgage insurance premiums charged on Federal Housing Administration (FHA) homes loans. FHA has an "upfront" and an "annual" Mortgage Insurance Premium (MIP) that is charged on all single family homes (1-4 units).

The new MIPs are effective on all FHA loan applications dated after October 4, 2010. For 30 year and 15 year mortgages, the upfront MIP will go down to 1.00% from 2.25%. The upfront MIP is a one time charge that gets added on to the base loan amount. The base loan amount would be the difference between the sales price and down payment on a purchase. The annual MIP will have an increase. For 30 year loans with less than 5% down payment, the annual MIP will increase from .55% to .90%. It will be .85% for 30 year loans with more than a 5% down payment. For 15 year mortgages, the annual MIP will be .25% with a 10% down payment or less. There is no annual MIP for 15 year mortgages with more than 10% down payment.

For 30 year loans originated after January 1, 2001, the annual MIP is automatically canceled after the loan balance reaches 78% of the original sales price, or the appraisal on a refinance, provided that at least five years of payments have been made. For 15 year loans the annual mortgage insurance is canceled after the balance reaches 78%, regardless of the length of time that payments were made. The upfront MIP has a partial refund schedule if the loan is paid off within the first few years.

Comparing the new vs. old MIP: borrowers will owe less on their home at closing but pay a higher monthly payment. Based on a $300,000 sales price the monthly payment for principal, interest, and mortgage insurance is an estimated $69 higher with the new premiums in effect. The good news is that FHA had the authority to raise the annual MIP to 1.55% but chose not to do so.

Prospective home buyers would want to compare all of their home financing options before making an offer on a home. Conventional loans with mortgage insurance may be an option for borrowers who have at least a 5% down payment, the required credit score, reserves, good job history, and do not need a co-borrower to qualify. An FHA loan will allow for a down payment of 3.5%, using gift funds for the purchase, co-borrowers are allowed with restrictions, and the credit scores requirement are not as stringent as Conventional loans.

Bill FitzMaurice
Home Loan Consultant
Professional Home Mortgage
Cell: 949.291.1770