FHA Mortgage Insurance Revisions for 2013

 

You may have heard some chatter near the end of last year about additional changes to the mortgage insurance structure for FHA Loans. While we had some hints that the changes would be a net negative for FHA borrowers, it was unclear as to the scope and the timing of the changes until now.
The good news is that there is still some time until the changes are implemented so any of your active FHA clients may be able to obtain a loan under the current, more beneficial mortgage insurance guidelines.  The other relief is that the changes are not dramatic and should not increase the cost of financing too much for most FHA borrowers. 

Mortgage Insurance is a Cost/Benefit Trade-off 

It is easy to hate mortgage insurance and most clients make it clear that this is their position early in a conversation.  Many see only the cost of mortgage insurance and overlook the benefit it provides; namely to own a home now instead of later or never.  Ever since the first survey of home buyers, the largest obstacle to owning has been saving enough for a down payment.  Before the advent of mortgage insurance the minimum required was 20%.  For most first time buyers, saving 20% for a down payment is a near impossibility and this is especially true in our marketplace.

FHA Mortgage Insurance Structure

FHA mortgage insurance has two components: an up-front premium (which is normally financed into the borrower's loan rather than paid in cash); and an ongoing yearly premium, which is prorated and paid as part of the borrowers' monthly mortgage payment.  Mortgage insurance premiums are paid to HUD (US Dept. of Housing and Development) and are used to insure the losses from FHA loans that are in default.  HUD changes the terms of FHA mortgage insurance periodically to adjust to the most recent level of loan losses and future expectations.

Upcoming Changes beginning 03/31/2013 & 06/02/2013

 
The monthly premiums shown assume a base loan amount of $350,000. 

The scheduled FHA mortgage insurance changes are two-fold.  The first change will begin for all FHA loans with FHA Case Numbers assigned no later than 3/31/2013 (a case number is assigned once a property is under contract) and will impact the amount of the yearly premium.  For the most common loan scenario, the yearly premium will be raised from the current level of 1.25% of the loan amount, to 1.35% of the loan amount.
The second change will begin with FHA Case Number assignments after 6/2/2013 and will impact the term of the yearly premiums.  Currently, the most common loan scenario requires yearly mortgage insurance premiums for a minimum of 5 years and may be cancelled once the loan principal is paid down to 78% of the home value when the loan was made.  The change will revert back to requiring yearly premiums through the entire term of the loan.
 
Muted Impact for Home Buyers
As shown above, the increase in the yearly premium modestly increases monthly payments on a $350,000 base loan amount by $30.  This amounts to a 1.3% increase to a PITI payment of $2300 currently.  As for the yearly premiums, it is only a recent and short lived change that allows for their removal and this is only under strict paydown of principal and time requirements.  It is yet to be seen how many of these loans will actually qualifying for removal.  The more traditional avenue for mortgage insurance removal has been to refinance into a conventional loan following market appreciation and it is my feeling that this will continue to be the case.  Even if mortgage rates move up from here, it will take a sustained move higher to erase the savings available to homeowners from refinancing into a loan without mortgage insurance premiums.