FHA Mortgage Insurance Rises as Agency Struggles with Financial Losses

By Brandon Cornett | March 6, 2013 | © 2014, all rights reserved | Duplication prohibited

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FHA loans have become the financing tool of choice for many home buyers. They offer lower down payments and more flexible approval criteria, when compared to conventional mortgages. But these loans are slowly but surely becoming more expensive and harder to obtain.

The latest change, scheduled to take effect next month, will increase the FHA mortgage insurance premium that borrowers must pay. Here’s what you need to know about it.

Borrowers who use the FHA program have to pay for two different types of insurance coverage on their loans. There is an annual mortgage insurance premium (MIP), as well as an up-front premium.

  • The up-front premium currently equals 1.75% of the amount borrowed, and can be ‘rolled’ into the loan and amortized over the term.
  • The annual premium is typically paid in 12 installments per year. It too can be rolled into the monthly payments. This is the one that’s going up in April 2013.

Mortgage Insurance Premiums Protect the Lender

Borrowers pay the cost of these premiums. But the coverage itself protects the lender. This is how the FHA loan program works. The Federal Housing Administration ensures the mortgage lender against losses that may result from a borrower default. So if the homeowner stops making the mortgage payments for some reason, the lender will be reimbursed for their losses out of the FHA’s insurance fund.

The primary benefit for borrowers is that they can put less money down compared to a conventional loan. Additionally, borrowers who get turned down for conventional financing can often get approved through the FHA program. So there are unique costs and benefits associated with this program.

But let’s get back to the FHA mortgage insurance premium.

Annual MIP Set to Increase on April 1, 2013

Starting on April 1, 2013, the annual mortgage insurance premium (MIP) for FHA loans will increase by 10 basis points, or by .10%. To see how this would affect your mortgage payments, you would simply multiply the loan amount by .0010, the decimal form of .10%.

For example, the MIP cost of a $200,000 FHA loan would go up by $200 per year. Remember, this is an annual mortgage insurance premium. So the .10% increase applies on an annual basis. (The math: 200,000 x .0010 = $200 more per year.)

The .10% increase applies to loans equal to or less than $625,500. For home loans that are larger than $625,500, the annual MIP will go up by 5 basis points, or 0.5%.

The following annual MIPs will be charged for loans with case numbers assigned on or after April 1, 2013:

Loan Term more than 15 Yrs
Base Loan Amount $625,500 or less Base Loan Amount above $625,500
LTV 95.01% or more 1.35%
LTV 95.00% or less 1.30%
LTV 95.01% or more = 1.55%
LTV 95.00% or less = 1.50%
Loan Term 15 Yrs or less
Base Loan Amount $625,500 or less Base Loan Amount above $625,500
LTV 90.01% or more = .70%
LTV 78.01% to 90.00 % = .45%
LTV 78.00% or less = 0.00%
LTV 90.01% or more = .95%
LTV 78.01% to 90.00 % = .70%
LTV 78.00% or less = 0.00%

As mentioned earlier, there is also an up-front mortgage insurance premium (UFMIP) applied to FHA loans. Despite the “up-front” name, this too can be rolled into the loan. The FHA’s current up-front premium is 1.75% of the loan amount. For example, a mortgage of $250,000 would incur a UFMIP of $4,375. This amount would be added to the loan balance, and would therefore increase the size of the borrower’s monthly payments.

The FHA has not announced any changes to the up-front premium – at least, not at this time. It is the annual FHA mortgage insurance premium that will increase on April 1, 2013.

But this doesn’t mean we won’t see additional increases down the road. In fact, the Department of Housing and Urban Development (HUD), which oversees the FHA program, has raised premiums a total of five times over the last three years. So we could certainly see additional hikes down the road, as the agency continues to rebuild its reserves.

Future of FHA Uncertain At Best

As mentioned earlier, the Federal Housing Administration insures mortgage loans against losses resulting from borrower default. So when a large number of borrowers default on their loans, the FHA suffers big financial losses. This is exactly what happened during the housing collapse that came to a head in 2008. We are still seeing the affects of it today.

Due to a congressional mandate, the FHA is required to maintain capital reserves equal to 2% of its total loan guarantees. They fell below that level three years ago. A recent audit found the agency to be deep in negative territory. This is why they are making so many changes to the program right now.

HUD has increased FHA mortgage insurance premiums several times over the last few years. But they haven’t stopped there. They’ve also implemented new rules regarding credit scores and debt ratios. All of this is an effort to protect the FHA against future financial losses, while restoring its capital reserves to acceptable levels.

Members of Congress have been pressing the FHA for change, and we are seeing some of those changes right now. The mortgage insurance premium increase is only one example of this. We expect to see additional policy changes over the coming months and years.

The housing crisis showed us that the FHA’s current model is unsustainable. As a result, the agency will continue to be analyzed, investigated and altered to protect it against such catastrophes in the future.