FHA first proposed the monthly mortgage insurance changes in the beginning of 2010. Bill H.R. 5981 was first passed by the House in the spring and was just passed by the Senate the other day. What does this bill do for FHA mortgages? They have projected that it will yield approximately $300 million per month to the FHA insurance fund.
So what are the new FHA changes? - For terms greater than 15 years -
LTV's <= 95% will increase the monthly fee to 85 bps
LTV's > 95% will increase the monthly fee to 90 bps
And lastly, it will reduce the Upfront Mortgage Insurance Premium, UFMIP, from 225 basis points to 100 basis points.
The plan is to go into effect by September 7th, 2010 on all FHA case numbers. FHA gives it's reasons to this new plan. FHA letter from David H. Stevens
UPDATE : as of 8/10/10 - HUD has announced to make this new change effective October 4th, 2010 -
So what do the actual changes mean to the average borrower that will rely on FHA loans when purchasing a new home or refinancing?
- The Old Plan -
LTV's <= 95% the monthly fee is 50 bps
LTV's > 95% the monthly fee is 55 bps
Example of the changes regarding the FHA monthly mortgage insurance known as MMI or annual mortgage insurance premium and the FHA upfront mortgage insurance premium known as UFMIP.
UPDATE BELOW in chart - The 2nd column, the upfront mortgage insurance premium, is usually added into the base loan amount. In this scenario, that is what I did. It's not actually a cash savings out of pocket, but just a reduction in the new loan amount. I guess it wasn't clear, because a few people said that this whole change was going to help those with less money out of pocket. The buyer still needs 3.5% out of pocket, which is the down payment.
As you can see, it would be much cheaper monthly with the old plan, even though you pay $3,317 more upfront, on top of your loan. This can also be a tax write off since it's included in your principal. Your break even point on this type of scenario is 47 months, which is roughly 3.9 years. After this break even point, you would have started to spend more money in reality. This is how FHA will increase it's mortgage fund. As you can see, it won't be increased as quickly upfront, but over a longer period of time. So if you held onto this mortgage for 7 years, you would have spent approximately $2,522 more.
Now, there are several other factors to consider when reviewing this kind of information. Just for the fact that your original balance on the loan will be $3,317 lower and in 7 years, still be that much lower. And as I mentioned, you would have a little more of a tax advantage on the higher balance though.
All I wanted to do was to present the basics of FHA loans and not get into the extreme details on how one could show either side. What could this do to a potential home buyer? It could reduce your purchasing power. In this scenario, if you had originally qualified for a $275,000 loan with qualifying ratios of 31/43, what would your new purchase price be.
- New Purchasing Power after September 6th, 2010 -
With the new FHA monthly mortgage insurance and the FHA upfront mortgage insurance premium changes, your purchasing value would drop approximately $10,000, a purchase price of $265,000. Now, these are just averages, because this will all be based on the actual purchase price. Meaning if values are higher or lower, the total amount could change some. But this should give you a good understanding of what changes lie ahead for FHA mortgages in the near future.
UPDATE : Travis Newton did a similar post, using a $200,000 purchase price and as you can see, the mortgage payment inceased by $45.29/month. Notice *** FHA Changes
UPDATE : as of 8/10/10 - HUD has announced to make this new change effective October 4th, 2010 -
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For more information on FHA loans, please go to this link. The FHA Expert
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
For information about FHA myths & FHA rumors, please read : FHA Myths & Rumors
Copyright © 2010 by Jeff Belonger of Infinity Home Mortgage Company, Inc
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