How Will the New FHA Mortgage Insurance Structure Affect Your Buying Power? - Cari provides some excellent insight into the FHA Mortgage Insurance Program changes and the effect on purchasing power as well as the new authorization for HUD to increase the Monthly Mortgage Insurance to a maximum of 1.55% pursuant to the passage of HR 5981 into law on 8/11/2010. (Currently pegged between .85-.90)
How Will the New FHA Mortgage Insurance Structure Affect Your Buying Power?
Earlier this month, HUD announced that there would be some forthcoming changes to its FHA mortgage insurance program on October 4th of this year. Since FHA loans are a good percentage of all loans funded today these changes could have a significant impact on the loan amount a potential borrower qualifies for. Let's look at how FHA mortgage insurance works. There are two types of FHA mortgage insurance that are charged in conjunction with FHA financing.
The first type is called the "Up Front Mortgage Insurance Premium" or "UFMIP." This is a lump sum that is a percentage of the base loan amount. For instance, if you are purchasing a $200,000 property with a 30 year fixed loan and you are utilizing the maximum loan amount FHA allows which is 96.5% of the home's value (3.5% down), your base loan amount would be $193,000. The UFMIP would be 2.25% of this amount which is $4342.50. There are two ways to pay for this. It can be paid in full at closing either from the borrower's funds or the seller can agree to pay it. The second, and arguably the more common method, is to have this tacked onto the base loan amount and finance it over the life of the loan. Therefore, your total loan amount would be $197,342 (since FHA loans are rounded down to the nearest dollar, you'd have to cover the whopping 50 cents!). This type of insurance will be reduced to just 1% of the base loan amount on October 4th. So in our example, this would be a premium of just $1930 and a savings of $2412.50 over the current rate.
The second type of FHA mortgage insurance is called "Monthly Mortgage Insurance" or "MMI." This is paid as part of your mortgage payment every month for a minimum of 5 years and until you have at least 22% equity in your home. The way this is calculated is to again, use the base loan amount and use the correct percentage factor. If you are utilizing the maximum financing (96.5%), then the percentage is .55% of the base loan amount. So $193,000 x .55% divided by 12 months a year = $88.46 per month in MMI. Please note that the monthly factor is .50% if you are putting down 5% or more and even less if you are taking advantage of a 15 year loan term. As of October 4th, the new factor will be between .85 and .90.** For maximum financing we would use .90 which, in our example would be $144.75 per month- $56.29 more than the current structure.
Let's compare side-by-side the hypothetical loan above under both old and new structures:
Purchase Price: $200,000
Loan Amount: $193,000
Interest rate: 4.75%
Loan Amount with: Current UFMIP: $197,342 UFMIP as of 10/4/10: $194,930
Principal & Interest Pmt with: Current UFMIP: $970.80 UFMIP as of 10/4/10: $958.94
MMI payment with: Current MMI: $88.46 MMI as of 10/4/10: $144.75
Overall difference: $44.43 more per month under the new structure
While this difference is not astronomical, it does add up to $533.16 more per year and $2665.80 more over the first 5 years of the loan which is the minimum time an FHA borrower must pay annual MMI.
**It is important to note that since the passing of HR 5981, and President Obama signing it into law on August 11th, 2010, Congress has given HUD the authority to ultimately raise the annual premium to a maximum 1.55% in the future. (But any increases down the line would only affect new FHA loans, not on loans already in place)
If you are looking to buy a home and you have not entered into a purchase contract by October 3rd, you will need to have your loan officer qualify you under the new MI structure. Regardless of the upcoming changes, the FHA-insured home loan is still a great program that should continue to play a large part in our nation's housing recovery.