There is a buzz in the real estate and mortgage world that says that FHA is moving towards changing how they charge insurance premiums – again!  And the proposal I am hearing is going to reduce the number of people who are eligible for the FHA Program, as well as make the program less attractive.

Let’s start by explaining that, contrary to the public’s consensus, the FHA is not a lender, they are a government owned insurance company.  They collect premiums from borrowers and insure lenders of repayment, if those borrowers default on their mortgages….this insurance allows lenders to loosen their underwriting standards and approve many more applicants.  Presently, they charge these premiums in two different ways:

1. The UFMIP (Up Front Mortgage Insurance Premium) for most FHA loans is levied at 2.25% of the loan amount.  The good news is that while it is a closing cost, the UFMIP can be (and usually is) financed….added on top of the base loan amount.  So, for example, on a $200,000 base loan amount has a $4500 UFMIP; therefore, the total loan amount is $204,500.  Because it is financed in the loan amount, our borrower is paying $24.17 in their monthly P&I payment to cover it (at a 5% note rate).
2. The second insurance charged is the MMIP (Monthly Mortgage Insurance Premium).  Currently, for most FHA loans is calculated by multiplying the principal balance of the loan by .55% and dividing by 12.  Because the principal balance is constantly being reduced as payments are made, the MMIP adjusts downward annually until such time as the principal balance is reduced to 78% of the purchase price (which will be a minimum of 5 years, but typically 12-14 years).  In our $200,000 example the MMIP is $91.67.  This amount, too, is added to the mortgage payment.

As you know, a major factor in approving borrowers is that borrower’s ability to repay the loan which is determined by dividing their debt by their income.  Any increase in payment makes it harder to qualify.  In our example, our borrower’s qualification includes a total of $115.84 to cover the FHA insurance premiums.

Now look at the proposed changes.  FHA wants to reduce the UFMIP to 1% and increase the MMIP to 1.55%.  On its surface it doesn’t look tragic, but let’s look at our example $200,000 loan.   Our total loan amount is now $202,000, which means the monthly impact of the $2000 is $10.74 (as opposed to the $24.17).  BUT, our MMIP has been increased to $258.33 (a whopping $166.66 more)!  In total, our borrower’s mortgage payment will go up $153.23!!!!

What’s the real impact?  The same borrower that qualifies for a $200,000 FHA loan, based on their income, will only qualify for $172,000 loan.  They will have to look in different neighborhoods and/or sellers will need to reduce their prices further to keep the same buyers interested in their home.  It has the same effect as interest rates going up more than 1%….I shudder to think what the cumulative effect will be if this happens AND rates go up.

I am asking you to call your elected officials and tell them that they need to stop the FHA from implementing this….NOW!!!

PS- I recognize the FHA needs to increase revenue to cover losses on bad loans, but I suggest they increase the UFMIP (when I started in the business it was 3.8% and no MMIP, for example) because our borrowers need not come up with more cash to close, as it is financed, and it has a much lower impact on people’s ability to qualify.  PLUS, the FHA gets more money now and doesn’t have to wait to collect it monthly over years.