UPDATE: Trump Administration Halts Pending FHA Insurance Rate Cut — FHA To Reduce Annual Insurance Premiums on Most Mortgages

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UPDATE, 1/21/2017 – The Trump Administration has indefinitely suspended the pending rate cut for mortgage insurance required for FHA-backed loans. 

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According to an official announcement from the Federal Housing Administration (FHA), the annual premiums most borrowers have to pay on FHA loans will be slashed, saving new FHA-insured homeowners an average of $500 in 2017.

According to a January 9 press release, the FHA is reducing its annual mortgage insurance premium (MIP) by 25 basis points (a quarter of a percent) for most new mortgages with a closing/disbursement date on or after January 27, 2017. 

Why is the FHA reducing its MIP now?

According to the press release, the decision had to do with strengthening value on the FHA’s Mutual Mortgage Insurance Fund, which gained $44 billion in value since 2012.

In 2016, an independent actuarial analysis found the MMI Fund’s capital ratio grew by $3.8 billion and now stands at 2.32 percent of all insurance in force — the second consecutive year since 2008 that FHA’s reserve ratio exceeded the statutorily required two percent threshold.

U.S. Housing and Urban Development Secretary Julián Castro said the FHA’s action reflects today’s risk environment and comes at the right time for consumers who are facing higher credit costs as mortgage interest rates are increasing.

“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” said Castro. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”

Ed Golding, Principal Deputy Assistant Secretary for HUD’s Office of Housing added, “We’ve carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers. Homeownership is the way most middle class Americans build wealth and achieve financial security for themselves and their families. This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American Dream.”

What is the FHA’s Mortgage Insurance Premium?

FHA mortgages offer an attractive low down payment minimum and less restrictive credit requirements than conventional mortgages. This makes them popular among first time buyers, low- to moderate-income buyers and buyers with less-than-perfect credit scores. However, these attractive features do come at some cost.

FHA loans require two separate types of mortgage insurance: Upfront and annual premiums. The upfront premium is a one-time fee paid at closing while the annual premium is a recurring annual fee but it is divided up and paid monthly. The FHA’s announcement to reduce the cost of FHA mortgage insurance was in reference to the annual mortgage insurance premium only.

Why do the FHA mortgage premiums exist?

These insurance premiums protect lenders from loss in the event that the homeowner stops paying their mortgage. It accomplishes this by supporting the FHA’s Mutual Mortgage Insurance (MMI) Fund. You could think of the MMI Fund as a big piggy bank, filled with money from FHA loan borrowers’ annual insurance premiums. If an FHA borrower defaults on their mortgage, their lender can file a claim with the FHA’s insurance and the agency will use funds from that piggy bank to cover some of the lender’s losses. Of course this is a very simplified explanation, as mortgage insurance can get somewhat complicated; however, the bottom line is, without the FHA mortgage insurance premiums, FHA loans would ultimately be too risky for lenders to offer.

When the mortgage insurance premiums are too high for too long, it makes FHA loans less affordable and therefore a less attainable option for the very borrowers the FHA loan program was designed to help.

During the economic downturn and housing market crash, lots of mortgage lenders were filing claims against the MMI Fund because so many homeowners weren’t paying their mortgage. FHA mortgage insurance premiums were raised to help replenish the MMI Fund and keep the FHA loan program going. Now that the economy has largely recovered and housing is back on track, the FHA has decided now’s time to lower the premiums, helping make homeownership more affordable for working families again.

 

 

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