A few days back, we mentioned the slew of recent changes made by the Federal Housing Administration. We covered the changes made to the FHA’s condo approval process in some detail, but there are several other changes that will affect a broader swath of people hoping to finance their home purchase with an FHA loan.
Here’s the Reader’s Digest version: The changes include an increase on the mortgage insurance premium (MIP), stricter credit and financial requirements for new borrowers, a 50% reduction in allowable seller concessions, and tighter enforcement on lenders who issue FHA-backed mortgages.
Today we’re going to tackle the MIP increase.
When a home-buyer borrows from an FHA lender, the FHA basically promises to cover the lender’s losses if the home-buyer defaults on his or her loan. The FHA has a special fund designed for this exact purpose – if the borrower defaults, the FHA draws from this reserve fund to cover the loss.
Where does the FHA get this magical pile of money? From the Mortgage Insurance Premium, which borrowers are required to pay when they get an FHA loan. The fee is divided into two components; an up-front payment that borrowers are expected to cover when they close the deal on their new home, and a monthly payment that continues until the borrowers have made enough payments to have 22% equity in their home.
The change being made to the MIP is this: the old up-front premium of 1.75% of the loan amount has been increased to 2.25%. The second component – the monthly premium – has not been changed. But, the FHA has requested permission to increase that fee as well. So place your bets.
Using the new rate, the upfront MIP payment on a $200,000 loan increases from $3,500 to $4,500. If the FHA gets permission to increase the monthly fee as well, would-be FHA home-buyers could soon be facing a significantly higher barrier to entry. And that’s without taking into account the FHA’s changes to its minimum down payment and credit requirements, or changes to the rules on seller concessions, which we’ll be covering in upcoming posts.