Houston Mortgage Blog

FHA loans increases its costs 75% overnight!

Posted by Daniel Jara on Tue, Apr, 10, 2012 @ 07:04 AM

man with head in hands 1 27 11jpgThat’s right. No exaggeration here. Starting this past Monday April 9th all FHA loan files will reflect a slew of new changes NONE of which are here to favor the home buyer. Through these changes FHA has tighten the purse strings on financing and some pundits, including yours truly, believe it’s because FHA just cannot handle the current risk of continuing to absorb close to 8x the volume they used to handle prior to the sub-prime crisis. As some in the industry now call it, “FHA IS the new subprime” or at least it used to be. Starting in early 2009 FHA started making major changes to their underwriting requirements and steadily increased its mortgage insurance costs but nothing as financially drastically as these changes.

Thought mortgage insurance was expensive? How about a 75% hike!

Starting April 9th FHA’s upfront insurance costs increases 75%! Upfront mortgage insurance on all FHA mortgages increased from 1.00% to 1.75% of the base loan amount (this applies regardless of the amortization term or Loan-to-value). So if you take out a $150k mortgage that’s $2,625 instead of $1,500 in upfront insurance that is tacked onto your mortgage. But wait there is more. Not only did FHA increase the upfront mortgage insurance, which gobbles up equity in your home, it also increased the annual mortgage insurance. This is the real whopper, because unlike upfront mortgage insurance which doesn’t move the needle much on the monthly affordability, the annual insurance rate directly affects the monthly payment. FHA with this change increased annual mortgage insurance rates 0.10% across the board and this is following up a previous increase from last year in April 2011. I have to admit 0.10% does not sound like much until you consider that just last April 2011 the mortgage insurance on a standard minimum down payment 30yr mortgage was 0.90%, now its 1.25%. That’s a 39% increase in just a year! Now you start to realize how quickly this cost is increasing.

Here’s a chart of the annual mortgage insurance as published by FHA (I have added the levels prior to April 2011)

Term > 15 Years        
    Annual MIP  Annual MIP    
 Base Loan LTV  Prior to 4/17/11   After 4/9/12 Increase 
 Any Amount ≤ 95.00%  85 bps  120 bps   41% 
 Any Amount > 95.00%   90 bps  125 bps   39% 
 Term ≤ 15 Years with LTV above 78%    Annual MIP  Annual MIP  
 Base Loan  LTV  Prior to 4/17/11  After 4/9/12  Increase
 Any Amount  ≤ 90.00%  0 bps  35 bps  ∞
 Any Amount  > 90.00%  25 bps  60 bps  140%









Click here for FHA letter 12-4 on changes to UPMIP and Annual mortgage insurance   

Had you purchased a home before April 17th 2011 vs. today on a 30yr mortgage with the minimum down payment and obtained a $150k mortgage with a 3.875% interest rate you’d be paying $49/mo less. That’s $590/yr and in some cases that pushes you out of a home purchase. 

By the way, ever think to yourself “I’m just a real estate professional, not a political junkie. What happens in Washington doesn’t directly affect me. I'll just keep my head down and keep working" Sound familiar? Think again, see page 2 of FHA’s mortgage letter 12-4. Straight from the letter “On December 23, 2011 the president signed into law the Temporary Payroll Cut Continuation Act of 2011 which requires FHA to increase the Annual MIP it collects” A short term tax cut for a select group of people subsidized through home financing. Doesn’t sound right? Get involved and call your congressman if this concerns you or support one of the many associations fighting on your behalf such as the NAMB, NAR or NAHB.

There is some good news; actions DELAYED! 

In addition to cost hikes being pushed through, FHA had planned to enact further tightening underwriting standards starting April 1st 2012 for:

  • Self-employed borrowers.

  • Disputed accounts on credit reports (who among us don’t have a dispute with a creditor)

  • Collection accounts (including medical in excess of $1k in the aggregate or singular); as well as

  • Non-arms length transactions (FHA calls them Identity of interest transactions)

Click here for the full letter on these changes

However, take heart. There are associations fighting on your behalf. I am proud to say that my industry leaders at the NAMB were the first to bring the problems to the attention of FHA Commissioner Carol Galante when they met on March 19th. With the help of other associations they were able to at least buy some time on the collection accounts and disputed accounts issue and open the possibiltity for further negotiation. Per FHA “In order to allow Mortgagees additional time to adapt their procedures to implement portions of the new guidance FHA is delaying the effective date” The new effective date of this section is delayed until July 1, 2012. FHA intends to seek additional input on this section and work to clarify guidance, as appropriate.

If you are not a member of the NAMB or your local chapter the GHAMP look them up and support them today.

Topics: Avoid Mortgage Insurance, mortgage, Purchase