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FHA Annual MI increasing to 1.15% on April 18th

By
Mortgage and Lending with Alterra Home Loans

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.

Posted by

D. Jed Wunderli

Certified Mortgage Planner

Alterra Home Loans

702-812-1214

Art Hademan
Century 21 Real Estate Center - Mount Vernon, WA

Jed,

Can't understand why the government doesn't get serious about the problems we're having in the real estate market.

These increases are being fueled by the need to tighten up our national budget but there isn't any obvious consideration to the affect this will have on the housing market.

Maybe I'm just stuck in the past but how are these increases going to help buyers?

Mar 13, 2011 07:51 AM
Larry Costa
Century 21 Classic Gold, Carver MA - Carver, MA
Realtor, MA Real Estate

Unfortunately this has to be done to keep the FHA solvent. David Stevens, the Commissioner for the FHA has a blog on AR and tells why HE decided to raise the insurance.

Mar 13, 2011 08:06 AM
Jed Wunderli
Alterra Home Loans - Las Vegas, NV

Larry - true, FHA needs more money 1) to meet the reserve requirement and 2) to offset the foreclosures that still occur with some regularity.  However, I do think there are better ways to do it and maybe even get more money in faster.  When the switch was made to lower the up-front MI and increase the monthly, that slowed down the rate at which the fund could be replenished for two reasons:  1) it reduced the lump-sum that FHA was able to collect up-front and put more on the back end in the form of monthly payments and 2) it reduced the total amount that would be collected per loan until about the end of the fourth year and beyond.

Mar 13, 2011 11:41 AM