FHA will increase the Annual mortgage insurance to 1.15% on April 18th; it is currently at .90% for most FHA loans. Just last year FHA reduced the up-front mortgage insurance from 2.25% to 1% while increasing the annual from .55% to .90%. The changes are due to the shortfall in reserves compared to the statutory level thy are supposed to be at. The minimum set by HUD is a 2% reserve of the outstanding loan balance insured by HUD (FHA). Currently the reserves balance is around .5%. Considering that the annual portion is what hits the debt to income ratio the hardest, I would propose some alternatives to this increase in an effort to build up the reserves.
I would propose that we raise the up-front mortgage insurance (the portion which is financed into the loan) to 1.75% (for example) and decrease the annual mortgage insurance to .75% for the average borrower / loan scenario. I would then propose that we give the borrower the option of paying all of the mortgage insurance up-front for which they would pay a premium - 3% (with this options there would be no annual mortgage insurance - the part that is paid monthly in the mortgage payment). I would also propose that we could reward people who use their own money for a down payment by reducing the up-front mortgage insurance by 20 basis points from 1.75% (as proposed above) to 1.55% and / or reducing the annual MI from .75% to .60%.
These are just some ideas I have since so many Realtors who I talk to think the increase in the FHA annual premium is going to further hinder the housing recovery. For instances, the monthly MI payment on a $200,000 FHA loan will increase from an already steep $150 to $191.67 - when the annual MI was .55%, the payment was only $91.67. On a $300,000 loan, the monthly MI increases from $225 to $287.50. When a borrower is already bumping his or her head against the debt ratio limit, this increase could mean that they no longer qualify which would have the effect of greater softness (decreasing prices) in the real estate market.
Please share your thoughts on FHA's annual mortgage insurance increase and any possible solutions you might have in the comments section. I'd love to hear them.
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