Last week, HUD announced their intention to change their insurance premiums, in order to raise HUD’s own reserves to cover anticipated losses and fund their operations. Let’s look at the impact on today’s home buyer, resulting from the changes which will go into effect on September 7th.

The “spin” is that they are trying to reduce the closing costs to buy a home by lowering the Up Front Mortgage Insurance Premium (UFMIP) from 2.25% to 1.00%.  On a $300,000 loan, the borrower will save 1.25% on $300,000 or $3750- a significant number no doubt. BUT, that amount can be financed into the mortgage; therefore, at 5%, the borrower’s monthly payment will only be reduced about $20 a month. Yes, $20 a month for 360 payments would be a big deal, but since most people are more concerned with their monthly payment than loan amount, let’s look at the other change to the insurance premiums…

The Monthly Mortgage Insurance Premium is being hiked from .55% to .85% – .90% (depending on if the loan-to-value of the mortgage is below or above 95%). This increase of 30-35 basis points is tantamount to an interest rate increase because that is how it is calculated. This move just made it harder to qualify for a mortgage because lenders use the ratio of your monthly payment as compared to your monthly income as a factor to determine eligibility. Here’s an example:

So, come September 7^th, the same loan will cost $67.50 more every month. Higher mortgage payment equals less people who qualify to buy a given home. The result will be LOWER HOME PRICES! In order for the same house to wind up with the same monthly mortgage payments, the price of the home will need to be lowered 4-5%!

The result of HUD’s new move is two-fold:

1. More expensive homeownership monthly OR a further reduction in selling prices
2. Less money to HUD in the short run (because of the lower UFMIP) and more for them in the long run (because the MMIP increase will accumulate over time and because loans closed today will likely not be paid off for a longer period of time as a result of the FHA assumability).

What does this mean to you?

If you are buying a home, buy before the monthly carrying cost goes up! If you’re selling, get it in contract before you have to lower the price even further for no reason except for the cost of your buyer’s mortgage!