The FHA have just announced they are going to increase buyers mortgage insurance "MI" payments AGAIN on April 18th by .25%. This is now the 2nd increase in just the last 7 months, as they also hiked MI payments last October. This will mean another significant increase in a new buyers overall mortgage payment. For example it will increase payments over $86 a month on a loan amount of $417k, which is the same as spiking someone's interest rate by .375%. This upcoming FHA change presents another great opportunity to create some urgency with any buyers who are still on the fence, so they can see what the cost of waiting to buy is.
Why is the FHA raising MI payments again in this market?
Last year the FHA announced its intention to raise its mortgage insurance premiums in a two-step process that was part of a larger program to put itself back on a firm financial footing. FHA's reserve funds have been depleting and needed shoring up immediately to withstand future imminent defaults. As this chart below shows, the FHA loan loss reserves are being eaten up fast, so this new increase in MI is not that surprising.
If you remember, it was only last year on August 12th 2010 that the FHA announced see here that they had passed a law where they can increase the monthly MI % up to a maximum of 1.55% (It's currently at .90%) at anytime in the future if need be. As this is already the 2nd monthly MI increase since that announcement, I have no doubt the FHA will continue to increase this monthly MI % in the near future as they try to shore up their finances. Which means of course loans will only get more expensive for future buyers.
What can a New Buyer expect to pay?
Effective for new loans that have their FHA case # pulled (go into contract) on or after April 18th 2011, the FHA will increase the annual premiums collected on a monthly basis by .25%. For FHA traditional purchase and refinance products, the annual premium, shown in basis points below, is to be remitted on a monthly basis, and will be charged based on the initial loan-to-value ratio and length of the mortgage according to the following schedule:
Loan to Value Monthly MI %
= or <95% financing increased from .85% to 1.10%
> 95% financing increased from .90% to 1.15%
Let's look at a loan example comparing someone buying before and after April 18th
Buying Before April 18th
Let's say a buyer wants to buy a new home for $425k and is using a 3.5% down payment. They get an interest rate of 4.875% on a 30 year fixed loan. The monthly MI is .90% and the upfront funding fee is 1%.
- Purchase price $425k
- 3.5% down payment is $14875
- Loan amount is $410,125
- Upfront FHA fee (UFMIP) is $4,101
- Total amount financed is $414,226
- MI factor at .90% = $310 monthly
Buying After April 18th
- Purchase price $425k
- 3.5% down payment is $14,875
- Loan amount is $410,125
- Upfront FHA fee (UFMIP) is $4101
- Total amount financed is $414,226
- MI factor at .90% = $396 monthly=$86 higher
This new MI % increase from .90% to 1.15% represents an increase in the borrower's payment of $86 a month. This monthly MI increase in payment is the same as increasing a buyer's interest rate by .375%. This is a significant amount of money for many families on a tight budget and may put a certain price range out of affordability for some buyers.
The unintended consequences of this new MI increase
There are always unintended consequences by these new changes or rulings. Ultimately the FHA have good intentions, as they do need to shore up their reserves if they are bleeding money, but what will happen is that they are going to shrink the pool of qualified buyers too. Now there will be borrowers who will not be able to qualify for a loan because the extra MI payment will push their debt to income ratios over the required limit.
Many first time home buyers already qualify for FHA loans with their debt to income ratios right at or just below the FHA maximum. This is another talking point to have with a buyer, to make sure this new increase in payment will not prevent them from qualifying for their desired purchase price anymore.
Show increase in MI to buyers on the fence
"What if you were told your interest rate would suddenly spike by another .375% Mr Buyer"? Well this new increase in MI is the same thing. This upcoming MI increase presents another great opportunity to create some urgency with any buyers who are still on the fence, so they can see what the cost of waiting to buy is. With so many buyers today fixated on "getting the lowest rate and payment", perhaps seeing figures like these above may just help a few buyers jump off the fence to buy before April 18th.
I am presenting all the buyers who are in my "on the fence pipeline" with a "before and after" April 18th scenario, so they can make an informed choice about their mortgage budget and buying plans. We already have one buyer who has committed to buying now, because he is a buyer who is very sensitive to any increases in his mortgage budget. If you send this scenario to all your buyers who are on the fence, I will be surprised if one does not commit to buying now instead of waiting until after April 18th.
With the upcoming increase in MI and with rates continuing to rise, now is a great time to buy for any people that are looking to get the most cost effective financing. Because as we will find out throughout the remainder of this year, mortgages and especially low down payment mortgages are only going to get more and more expensive.
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