FHA's New Mortgage Insurance Premiums--Will This Affect Buying Power?

The answer is...yes it will, and it might be best for them to go under contract before October 4.

With the passing of H.R. 5981 and the resulting Public Law 111-229, FHA was given authority to change the amount charged to borrowers for both the Up Front and the Annual premiums. These changes as outlined in Mortgagee Letter 2010-28, are effective for all case numbers assigned on or after October 4th, 2010.

Here are the 6 things you need to know about these changes:

1. The Up Front premium is now 1.0 % for all standard FHA programs (purchase money mortgages, full credit-qualifying refinances, streamline refinances)
   |
2. The Annual premium is now .90% for LTVs GREATER than 95% on 30 year loans
   
   
3. The Annual premium is now .85% for LTVs EQUAL to or LESS than 95% on 30 year loans
   
   
4. The Annual premium is now .25% for LTVs GREATER than 90% on 15 year loans
   
   
5. The Annual premium is now .00% for LTVs EQUAL to or LESS than 90% on 15 year loans
   
   
6. These premiums apply to purchases, regular refinances and streamlines

Please note that this new law also gives FHA the authority to raise the Annual premium at will up to 1.5% for LTVs at or below 95% and 1.55% for LTVs more than 95%.

Here's how it affects a hypothetical purchase of 200,000 with a 3.5% down payment, giving a loan amount of 193000 (96.5% LTV):

Current FHA Up Front Premium is 2.25% of 193,000 or 4342, so total loan amount is 197342.  The monthly principal and interest is 999.90, MI is 87.81, so the total monthly payment (principal+interest+MI) is 1087.71 at 4.5% interest.

Revised FHA Up Front Premium is 1% of 193000 or 1930, so total loan amount is 194930.  The monthly principal and interest is 987.68, MI is 143.69, so the total monthly payment is 1131.37.

So the monthly payment will go up by $43.66.   Using standard qualifying ratios, this would mean the borrower's income to qualify would have to be about $110 more per month. 

Another way to look at it is that $43.66 would have allowed them to borrow about $8600 more if they can go under contract prior to October 4.

If you have FHA buyers, and their income to qualify is tight, or they want to be able to spend a little more now, then they should go under contract and have their lender pull an FHA case number prior to October 4, 2010.

Contact your lender if your borrowers are looking in a particular price range, and have them run the numbers for you for that specific case so you'll know the monthly savings for your borrower if they act now.