The Federal Housing Administration (FHA) has indicated plans to decrease mortgage insurance premiums required for mortgages to help make home ownership more affordable, especially for lower-income and first-time buyers.
Loans backed by the FHA are well-liked by buyers and those wanting to refinance for a number of reasons, such as requiring only a 3.5% down payment.
Mortgage insurance premiums help protect mortgage lenders against any potential losses that can result from home owners defaulting on their loans. Such insurance is typically required when home owners have less than a 20% down payment. However, the mortgage insurance required by the FHA can vary based on the type of loan and its length.
Since the housing crisis, the FHA has had to increase the mortgage premiums to counterbalance the losses incurred from foreclosures of that time. As the fees currently stand at 1.35 of the mortgage loan balance, first time home buyers as well as lower income households have been priced out of the market.
As of January 26 2015, the fees that the FHA charges to guarantee loans will be decreased by 0.5 % to 0.85% on the balance of 30 year mortgages where the down payment was less than 5% of the home price. When these changes take effect, approximately 2 million home buyers or those who need to refinance could save, on average, $900 per year over the next three years. Additionally, approximately 250,000 new home owners could enter the housing market, according to the FHA. For those FHA mortgages that had more than a 5% down payment, the rate will decrease to 0.80, down from 1.30.
However, those borrowers who have 15 year mortgages will not be eligible for the new decreased rates. Their rates will continue to range between 0.45 and 0.95 %, depending on the type of loan and its length.
For those borrowers whose mortgage applications for loans and refinancing are currently in process and already have a case number assigned, they are allowed to be have their mortgages temporarily canceled and then restarted after January 26 2015 to take advantage of the upcoming lower rates.
The FHA also charges its borrowers an upfront fee, which is 1.75 % of the mortgage balance, but this fee is expected to remain at the same rate.
What does this mean for home owners? Anyone intending to buy a home in the near future through an FHA backed mortgage or who is in the process of closing on their home can benefit from lower fees. Make sure you talk to your mortgage lender about the details of your specific situation, and ask questions to ensure that you have a full understanding of the ramifications of this upcoming FHA MIP change.
For loan originators, make sure you review the mortgages in your pipeline to see if any current or upcoming loans are eligible for the lower FHA MIP fees. If possible, have the closing take place after January 26 2015 so that the borrowers can enjoy the savings. Additionally, don’t order case numbers before January 26. This not only benefits the home owners, but also ensures that you do not have to cancel case numbers and then re-open them after the change date. Finally, review your past production and start working on a refinancing marketing campaign. Calculate and emphasize the cost savings of the lower FHA MIP fees to add hard numbers for your clients.
It’s the start of a new year, and hearing great news about lower fees associated with owning a home is a great way to start it. Find out if you or your clients are eligible for these reduced fees, and take advantage of it – home ownership can be closer than your realize.