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On October 4, buyers use FHA financing will encounter an unusual surprise. Their mortgages will cost more over time, but it will cost them less than it does today to close on their loan.

FHA Softens Mortgage Insurance Blow

On October 4, buyers use FHA financing will encounter an unusual surprise. Their mortgages will cost more over time, but it will cost them less than it does today to close on their loan.

That’s because some creative bookkeeping at HUD has spread the scheduled increase in FHA’s mandatory mortgage insurance premiums over the life of the loan, and will actually reduce the up-front payment at closing from the current 1.75 percent of the loan to 1.00 percent.

Mortgage insurance payments, however, will increase from 55 to 90 basis points. On a $275,000 mortgage, the change in payment would be about $70 higher a month. On a $125,000 mortgage, the increase would amount to about $27 more a month.

Even though recent legislation passed by Congress authorized HUF to raise upfront mortgage insurance premiums as high as 2.25 percent of the loan, an increase that was originally scheduled to take effect today, HUD has decided to raise the annual premium and correspondingly lower the upfront premium, except for Home Equity Conversion Mortgages (HECM), so that FHA is in a better position “to address the increased demands of the marketplace and return the Mutual Mortgage Insurance (MMI) fund to congressionally mandated levels without disruption to the housing market,” according to a message circulated to FHA lenders September 1.

The change is causing some confusion in the marketplace, as some lenders are trying to use the increase in premiums to encourage buyers to close before the deadline. Others, including a loan officer whose scary email to buyers was forwarded to a real estate agent and published on the Agent Genius web site today, are getting their facts wrong. “This loan officer will not be let loose near my clients,” noted the agent.

8 comments

  1. There is some incorrect information is in this article.

    The FHA upfront mortgage insurance premium (UFMIP) is currently 2.25% and as been since April 2010. Previously it was 1.75% and prior to the mortgage turmoil it was at 1.5%.

    The UFMIP is rarely paid in cash at closing. It is typically financed which means that the loan amount the borrower pays on increases and this increase is reflected in the principal and interest payment. There is certainly no “blow” at closing.

    Currently the monthly mortgage insurance (MI) premium is .55% for scenarios with down payment less than 5% which is most common since only a 3.5% down payment is required. After 10/4 this premium will increase to .90%.

    Starting 10/4 the UFMIP will be lowered to 1% and the monthly MI will be .90%, .85% if you put 5% or more down. The net affect of this will be that the monthly mortgage payment for the same purchase/loan amount will now be higher. The increase in monthly payment is about 3.85% which will slightly reduce the amount a borrower will qualify for.

    The FHA MI will now be very similar to the private mortgage insurance (PMI) premium rates.

    I would not call anything in all this a big blow, or claim that it is in any way scary. More like a slight blow to borrowers who will be faced with a slightly higher mortgage payment.

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