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Thursday, February 21, 2013

You gotta hustle to beat the FHA changes to MIP

The Federal Housing Authority (FHA) which backs most home loans made in the U.S. has announced changes that will cost everyone who takes out an FHA loan on or after April 1. Somehow April Fool’s Day seems appropriate, except that the joke’s on us all.

FHA is required, under the law that created it, to maintain a capital base of 2% of its total loan obligations. Currently, due to eating losses on the large number of defaults on the bad loans that it backed during the real estate bubble, FHA is running at about 1.44% capitalization. The bottom line is that is need more money to continue to operate. One way that it gets money is from collecting a Mortgage Insurance Premium (MIP). FHA’s is the equivalent of PMI – Private Mortgage Insurance, a term that you may be more familiar with from your past real estate dealings. So they’ve decided to increase rates and apply those increases more broadly that they do right now.

The FHA announced changes will have long-term effect on the housing market. They aren’t huge amounts, but these days every bit counts and every small increase hurts people who are already struggling to get into their own home.

First, they are increasing the MIP rates as of April 1st. The increases are anywhere from 5 to 10 basis points, depending upon the loan amount and the Loan to Value (LTV) ratio calculated for the loan. A basis point is 1 / 100th of 1 percent. So the increases equate to increases of .00005 to .00010 of added cost per month. The base MIP that these increases are being added to range from 120 to 150 basis points. So, now, on a $100,000 loan you’ll go from paying between $120 to $150 a month to paying $130 to $155 a month.  

Second, as of June 3rd, they are revoking an exemption that existed for years on loans of 15 years or less. Those loans will now have MIP premiums collected.

Third, as of June 3rd they are also revising the long-standing policy of removing the MIP requirement when FHA loans had a LTV equal to or less than 78% at the time of origination.

Fourth, they have revised the periods for which MIPs may be collected, with these changes to take effect June 3rd, also. For loans with LTV of less than 90% the MIP will be collected until the end of the loan or for the first 11 years, whichever comes first. And for loans where the LTV is higher than 90% the MIP will be collected until the end of the loan or the first 30 years, whichever comes first. That may be the biggest change in this whole thing, since many buyers could look forward to getting out from under the MIP once they made enough payments. Not so under these new rules.

The bottom line of all of this is that it’s going to cost more for an FHA loan after April 1st and after June 3rd you’ll be stuck with that increase pretty much forever (or until you sell or pay it off). So, if you’ve been kind of putzing around looking for a house, now’s the time to get it in gear and get your offer in. These rules won’t affect you if you get an FHA case number assigned before the deadline dates and the only way to make that happen is to have a mortgage application in place by then.

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