How changes to FHA loans could impact you

Two major changes to FHA loans designed to boost its depleted mortgage insurance fund may result in many borrowers opting to forego an FHA loan for a conventional loan with private mortgage insurance.

The first change became effective April 1, 2013 in which the annual mortgage insurance premium charged to borrowers has increased 5-10 basis points, depending on the loan amount and loan term.

For example, for a 30-year $500,000 loan with a loan-to-value ratio greater than 95%, the new FHA mortgage insurance premium will be 1.35% or $6,750 per year (previously 1.25% or $6,250 per year), for an overall increase of $500 per year or $42 per month.

Chart shows changes to premium calculation

Loan term greater than 15 years
Base Loan Amount Loan-to-Value Previous MIP New MIP
≤625,000 ≤ 95% 1.2%  1.3% 
≤625,000  > 95%  1.25%  1.35% 
>625,500 ≤ 95%  1.45%  1.5% 
>625,500  > 95%  1.5%  1.55% 
Loan term 15 years or less
Base Loan Amount Loan-to-Value Previous MIP New MIP
≤625,000 78.01% - 90%  0.35% 0.45% 
≤625,000  > 90%  0.6%  0.7% 
>625,500 78.01% - 90%  0.6%  0.7% 
>625,500  > 90%  0.85%  0.95% 

However, please note, the premium increases will not apply for FHA streamline refinances which were originally entered into on or before May 1, 2009 and are subsequently being refinanced into a new FHA loan.

The potentially biggest hit to borrowers, however, is the change in how long the annual mortgage insurance premiums will be paid over the life of the loan. In the past, the FHA mortgage insurance premium would automatically terminate on a 30-year loan anytime after 5 years and the loan-to-value ratio reached 78% of the original loan amount. 

Beginning June 3, 2013 however, a borrower taking out a 30-year FHA loan with less than 10% down, will result in the borrower having to pay mortgage insurance for the entire life of the loan.

If the loan-to-value ratio is between 78%-90%, the premium payment will be cancelled once the loan balance drops below 78% of the original loan amount anytime after 11 years.

Chart shows duration of new annual mortgage insurance premiums

Base Loan Amount Loan-to-Value Previous MIP New MIP
≤ 15 years ≤ 78% No annual MIP 11 years
≤ 15 years  > 78% - 90% Cancelled at 78% LTV  11 years 
≤ 15 years > 90% Cancelled at 78% LTV Loan term
> 15 years ≤ 78% 5 years 11 years
> 15 years > 78% - 90% Cancelled at 78% LTV
and 5 years
11 years 
> 15 years > 90%  Cancelled at 78% LTV
and 5 years
Loan term

It will become very important for all purchasers to sit down with their loan officers, calculate their finances and determine whether an FHA loan or a conventional loan with private mortgage insurance (which may be cancelled after 1 year if the borrower is able to pay down the mortgage or their property value increases), is right for them. 

In addition to the changes above that have been or will be implemented in the next few months, there is speculation that FHA will also seek to increase the minimum down payment requirement for loans over $625,000 from 3.5% to 5%. To date however, this is simply speculation and no final decision has been made or approved.

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