For years, homebuyers have struggled to save up large down payments on their home in order to avoid paying extra mortgage insurance premiums (MIP) charged by the Federal Housing Administration (FHA), who insures many mortgage loans. Unfortunately, thanks to recent changes by the Federal Housing Administration (FHA), lowering your loan-to-value (LTV) ratio enough to escape MIPs will not be as easy as it used to be. The restructuring of the guidelines also makes FHA loans more expensive overall.
A Brief FHA Overview
Many different types of mortgage loans are connected to the FHA one way or another. FHA loans include conventional loans issues by Fannie or Freddie Mac, VA loans and/or USDA loans through the U.S. Department of Agriculture. Even if you go through a third-party mortgage company, there is a good chance that your mortgage will still be insured by the FHA and unwritten using their criteria so FHA rules will generally apply. As of this writing, FHA-insured mortgages account for approximately 20% of all home purchases.
There are two types of premiums charged on FHA-insured mortgages. The first is an upfront mortgage insurance premium (UFMIP) of 1.75% charged at closing. It is a one-time charge that maybe particular refundable for those who participate in the FHA Streamline program. The second mortgage insurance premium is based on the loan-to-value ratio. Previously, borrowers with an LTV of 78% or below were exempt from paying annual mortgage insurance, but after June 3, 2013, that is going to change. Many borrowers with an LTV over 78% could drop the MIP after 5 years, but the rules for that are changing as well.
The New Rules
Many homeowners will lose their ability to cancel their MIP, especially borrowers who utilize the FHA’s 3.5% down payment system. For many, the MIP will now last for the life of the mortgage. Loans that begin at 90% or less LTV will have to pay the yearly MIP for at least 11 years. For loans that start over 90% or more, borrowers will have to pay the annual mortgage insurance protection for the entire life of the loan. Since the value of the home is based on its assessment when the mortgage is taken out, even if the owners accrue 22% or more in equity, the will still have to pay MIP based on the timeline outlined by when their LTV was established.
This change has come about simply because the FHA has run out of money; and you can click here to read a bit more about mortgages and these rules. The Mutual Mortgage Insurance Fund, which pays on FHA claims, is no longer collecting enough in premiums to be financially viable. In fact, it has a negative balance of $1.44 for every $100 it insures. If you can get an FHA case number before June 3, 2013 you will be grandfathered into the old polices regardless of when your settlement date is, but otherwise you will have to pay the new MIP rates.