FHA loans have two tiers of mortgage insurance. First type is called Upfront MIP which is typically financed into the loan and a monthly MI (mortgage insurance premium)
With the current FHA mortgage insurance before the new changes, there is an up-front mortgage insurance premium equal to of 1 percent of the loan’s amount. Upfront MIP can either be paid in the closing costs of the loan, or borrowers can finance it by adding it to the loan amount. In either option this fee is shown as a closing cost to borrower on the GFE (Good Faith Estimate) and the HUD (settlement statement) at closing.
There is also an annual MI premium that varies by loan type. For 30-year fixed rate mortgage, annual MIP is equal to 1.1% of your loan size for LTVs of 95% or lower. For everyone else, annual MIP is 1.15% of the loan size.
Annual MIP is paid monthly. The formula is (Loan Size) * (MIP Rate) / (12 Months) = Monthly MIP payment. So as you pay down your loan balance the monthly MI is reduced until you reach 80% of the original property value (sale price in a purchase transaction)
So what do these new FHA's mortgage insurance rates mean to someone using this program to buy a home?
Starting April 1, 2012, Upfront MIP for loans will increase from 1.000% to 1.750% of the loan size. Annual MIP fees, paid monthly with your mortgage payment will also change, effective April 18th they will increase by 10 basis points across the board, and by an additional 25 basis points for loans between $625,500 and $729,750.
$729,750 is the largest FHA loan limit. It's reserved for high-cost areas like the Washington, D.C. Metro area, New York City, and many parts of California.
If you or your client(s) are looking to take advantage of FHA’s low down payment requirement (3-1/2% down) for your next mortgage, the best way to avoid the new FHA fees is to have your FHA Case Number assigned before the new FHA MI premiums go into effect April 1, 2012. All existing FHA mortgages are un-effected and will use the "old" MI rates currently applicable on the borrower’s loan.
The reason these changes are going into effect is detailed very well in an article “Congress votes to restore FHA loan limits”
In 2000 FHA accounted for around 10.5% of the purchase market in this country and in 2005 – 2006 that dropped to around 3%, but since the mortgage crisis hit around 2007 FHA soared back as a viable way for home buyers with a market share in 2009 around 46%.
So Congress has been working to shore up the red ink at HUD / FHA with the increased MI fee’s and premiums.
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