In October 2010, FHA announced that they were revamping their mortgage insurance premiums. I actually wrote about this change in April 2010. At that point there was a provision in front of Congress that would allow FHA to increase their monthly mortgage insurance to as much as 1.55% from, at that time, a current monthly mortgage insurance premium of .55%. The October announcement stated that effective October 4th, monthly MI premiums would increase from .55 to .90 on any loan to value above 95%. In addition, the upfront percentage would actually be reduced from 2.25% to 1.00%.
The immediate effect and spin of this change was that the borrower was financing less. The claim is undisputable on its own, however, if one were to look deeper at the change they would realize that while the amount they financed went down by 1.25%, their monthly obligation would increase. For example on a 200,000 loan amount a borrowers monthly obligation would increase by approximately $45 per month.
Well, FHA is at it again. In a recent announcement, FHA has decided to increase the monthly mortgage insurance premium 1.15% from .90%. Now a 200,000 loan amount carries an addition monthly payment of $42 per month above the original increase of $45. All told, the difference between FHA financing as of April 18, 2011 versus FHA financing prior to October 4, 2010 is $87 per month. Additionally, since Congress granted the authority to FHA to increase their premiums to 1.55% you can guarantee that it will hit mark sooner rather than later.
What does this mean for the consumer? Well, it shrinks the borrower pool because it makes it harder to qualify because of the increased debt service. It also makes a FHA loan a lot less desirable when compared to conventional financing with mortgage insurance. It is my belief that FHA is doing exactly what conventional mortgage insurance companies did immediately following the subprime fallout: they are increasing their premiums significantly enough to reduce their market share. FHA guarantees too many loans right now and these mortgage insurance increases are designed to reduce that portfolio.
In no way does this mean that a FHA loan is a bad loan or if you currently have a FHA loan you should get out of it. It is/was a great loan product that now has competition from conventional mortgage insurance. For the past 8-10 months I’ve been telling my borrowers, if they qualify, that a conventional loan with mortgage insurance is the far cheaper option and better loan product. The same 200,000 loan amount would require a 5% down payment and eliminates a monthly mortgage insurance premium with a single financed premium of 1.75% of the loan amount.
Compare it this way:
- Conventional Loan (Single Financed MI premium): 1225.07/mo
- FHA Loan Prior to April 18, 2011: 1367.54/mo
- FHA Loan After April 18, 2011: 1409.62/mo
The conventional mortgage insurance option wins out in every way possible with the exception that you are required to put an additional 1.5% of the purchase price down. After April 18th, that $3,000.00 difference in down payment is made up after 16 months of payments in a conventional loan.
For some companies it will be business as usual and the MI increases for FHA will be passed along to the consumer, unless you are with a company like Assured Mortgage Bankers Corp who has the expertise and product knowledge to put you in a loan product that best suits YOUR needs.
Michael Conti
