Well, the Federal Housing Administration (FHA) is at it again. In an effort to reduce the amount of risk exposure the federal organization has in the housing markets, they have agreed to make some pretty hefty changes to FHA loans moving forward. The most notable changes include:
- Increase in monthly mortgage insurance premiums (MIP)
- Elimination of MIP removal at 78% loan-to-value ratio
Now, let’s take a closer look at exactly how these changes will affect the typical Florida homeowner or buyer.
Increase in Monthly Mortgage Insurance Premiums
Mortgage insurance is an insurance policy that a mortgage bank requires if you are putting less that 20% down or have less than 20% equity in your home. This policy is intended solely for the bank’s benefit to protect them from default and is in addition to any homeowner’s (sometimes called hazard) insurance. There are two parts to FHA mortgage insurance, the up front premium and the monthly premium. The up-front premium is a one time charge and the monthly premium is charged (you guessed it!) monthly.
Currently, if you were to buy a home using a 30 year FHA loan, you would have to pay a 1.75% up-front MIP charge in addition to a 1.25% monthly MIP charge.
So, if you were taking out a $200k loan, you’d be looking at an up-front (added on top of your loan amount, no need to pay out of pocket) MIP charge of $3,500 (1.75% of $200k) and a monthly premium of $208.33 ($200k x .125 / 12 months).
After April 1, 2013 most FHA loans originated will have an increase of .10 % (from 1.25% to 1.35%), meaning higher mortgage payments and reduced maximum qualification amounts for future Florida home buyers.
Elimination of Automatic MIP Removal
The way it is currently, FHA loans only keep the monthly mortgage insurance premiums until the FHA loan reaches 78% loan-to-value ratio (LTV). If you originally purchased a $200,000 home with a 30 year FHA mortgage, once your loan balance reaches $156,000 (78% of the original $200k), you’d no longer have to pay mortgage insurance! This is a very joyous occasion for most FHA borrowers and typically results in a dramatic drop in payment.
Effective June 3, 2013, FHA is removing this automatic removal of monthly MIP and making it so that it never cancels! This change is HUGE as it could cost you and your family tens of thousands of dollars in unnecessary insurance premiums.
How to Beat the Changes
If you are looking to refinance or purchase a home for the lowest payment possible, it is in your best interest to do so immediately to avoid these FHA changes. FHA is the go-to program for most first time home buyers and makes it much easier to get into a home than a lot of other loan programs. Don’t stand on the sidelines as interest rates increase and loan programs change and disappear. Now is the time to act, now is the time to beat the FHA changes! Apply right now to reserve your spot in the old FHA guidelines.