In a letter from the U.S. Department of Housing and Urban Development (HUD), dated January 9, 2017, HUD has announced the reduction of annual Mortgage Insurance Premium (MIP) rates for homes closed on or after January 27, 2017. This will save borrowers money on their monthly payments which can lead to bigger savings and better financial well-being for homeowners. It will also allow for more families to get into the home of their dreams.
How does FHA Mortgage Insurance Work?
When a borrower applies for an FHA loan, they are able to make a down payment of as low as 3.5% of the home’s purchase price. For any loan in which the borrower cannot put a full 20% down payment, they are required to pay mortgage insurance, which is generally added to their monthly mortgage payment.
Since FHA loans are insured and backed by the US Government, the mortgage insurance paid by the borrower will reimburse the lender in the event that the borrower cannot make their monthly payment and go into default.
FHA Passes Down Mortgage Insurance Savings
The money which borrowers pay towards their mortgage insurance goes into FHA’s Mutual Mortgage Insurance Fund (MMIF), a pool of funds designed to aid lenders in the event of another housing market crash. According to HUD officials, the MMIF has grown in value significantly since 2012, by $44 billion, as evidence of an increase in quality lending and a decrease in borrowers defaulting on their loans.
Therefore, due to the increased pool of funds in the MMIF, HUD has chosen to reduce the annual MIP rates, lowering its annual rate by 25 basis points, or 0.25%. This will lower the typical FHA house payment by an average of $500 per year in 2017. That’s more than $41 per month for the average borrower! Homeowners taking out larger loans will see even larger savings.
Here is a chart from the official policy change letter by HUD, showing current annual MIP as well as the new reduced premiums which will soon take effect.
Who Will this Effect?
This new FHA discount on MIP affects all FHA Title II forward mortgage programs, with terms greater than 15 years and closing on or after January 27, 2017. This new change will not affect Single Family forward streamline refinances which were endorsed on or before May 31, 2009. It will also not affect Section 247 mortgages (Hawaiian Homelands).
Now that the cost of an FHA loan is going down, more borrowers and their families should be able to qualify for an FHA loan. This could incentivize more first-time homebuyers to enter the housing market.
If you or your clients have questions about how this may affect their home loan, or if they are interested in taking advantage of the new lower MIP, give The Polder Group at Summit Funding a call. We would love to help!