Facing a financial crisis, FHA is asking first-time buyers to pay for the sins of borrowers who came before them. Increases in FHA mortgage insurance premiums and new, tougher underwriting standards that take effect April 1 will cost new borrowers significantly more than refinancing borrowers who have had an FHA loan four years or longer.
On April 1, FHA ill raise the annual mortgage insurance premium paid by borrowers on most new FHA loans by 10 basis points, or 0.1 percent, which the agency expects will add $13 a month to the average borrower’s monthly payments. FHA will also increase premiums on jumbo mortgages (those $625,500 or bigger) by 5 basis points or 0.05 percent, to 155 basis points — the maximum currently allowed by law. Certain streamline refinance transactions will be excluded from the premium increases, the agency said.
The agency is saddled with as much as $16.3 billion in debt due to defaults on loans it insured as the housing market crashed and is facing the grim possibility of asking Congress for a bail out in the midst of the rancorous debate over the budget deficit.
The details of the April 1 changes were released Monday and suggest that impact of the changes to FHA loans, popular with first-time buyers because of their low down payments, will be felt more by new borrowers than those who took out FHA loans before 2009.
FHA is the greatest source of financing for first-time buyers. Some 46 percent of all first-time home buyers relied on FHA loans last year. Affordable prices and buyer’s market conditions make this a good time for first-time buyers but, largely because of difficulties getting financing, the market share for first-time buyers is depressed, accounting for only 30 percent of home sales in January compared to the normal level of about 40 percent. The FHA changes will make it even more difficult and costly for first-time buyers to get financing.
Beginning April 1, 2013 — 39 days from now — new FHA borrowers will pay as much as 1.55 percent for annual FHA mortgage insurance, and for the first time ever, they will pay the FHA mortgage insurance premium (MIP) for the entire life of their loan, according to blogger Dan Green.
The MIP is split in two parts. The first part is called “upfront mortgage insurance” (UFMIP) and it’s a one-time payment that is made at closing. UFMIP is traditionally added to the loan size, and is not used in loan-to-value (LTV) calculations for an FHA loan. The FHA will continue to assess upfront mortgage insurance premiums at 1.75 percent of the loan size for all new borrowers, or $1,750 for every $100,000 borrowed. This is the same rate at which the FHA currently assesses UFMIP.
The second part of FHA mortgage insurance is known as the annual mortgage insurance premium (MIP). Annual MIP is paid monthly as part of the regular mortgage payment. After April 1, the annual MIP will increase for the majority of new mortgages by 10 basis points, or 0.1 percent. This is expected to add $13 a month to the average borrower’s monthly payments.
FHA has automatically canceled required premium payments after loans reached 78 percent of their original value…until now. New borrowers will have to pay required annual mortgage insurance premiums for the life of the loan. Unlike upfront mortgage insurance premiums, annual MIP payments vary based on your loan term, your loan-to-value, and your loan size. The agency estimates it lost billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this cancellation policy.
Refinancing borrowers who have been with FHA four years or more also will get a break. If a current FHA-insured mortgage pre-dates June 1, 2009, the FHA will allow the borrower to use the FHA Streamline Refinance program and not require him to pay the new, higher MIP rates. For these “grandfathered” loans, the UFMIP charged is equal to 0.01 percent of the loan size, or $10 for every $100,000 borrowed. This amount is added to the loan balance at the time of closing. The annual mortgage insurance premium schedule for such “old loans” is similarly low: 15-year fixed rate mortgage with loan-to-value of 78 percent or less –no annual MIP required; 15-year fixed rate mortgage with loan-to-value greater than 78 percent –0.55 percent annual MIP; and 30-year fixed rate mortgage, all loan-to-values–0.55 percent annual MIP.
Many first-time buyers have borderline FICO scores and borrowers with FICO credit scores below 620 and a total debt-to-income ratio of more than 43 percent will not be eligible for processing through FHA’s automated underwriting system after April 1. They will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.
Borrowers with jumbo loans of $625,000 or more will also see premiums increase, by 5 basis points or 0.05 percent. The minimum downpayment requirement on jumbo loans will go from 3.5 percent to 5 percent on loans between $625,500 to $729,000.