One of the loan brokers we like to refer our clients to is Jed Thibodeau who is with Bankers Preferred in Burlingame. He often speaks at our weekly office meetings and told us about a major change coming to FHA loans beginning on October 4, 2010. This change will cost you money every month for the entire length of your FHA loan and it’s a huge change. If you think this change is short notice, it’s better than what we heard on Monday, with the original date in early September. Either way, don’t wait too long to make a purchase if you are planning on using FHA as your loan source. Take your time reading this because there is a lot of alphabet soup in it.
Please read below:
Avoid increasing costs of FHA financing. On Thursday, August 5, 2010 Assistant Secretary for Housing/Federal Housing Commissioner, David H. Stevens, issued a memo informing the housing industry of changes to Federal Housing Administration (FHA) mortgage insurance premiums. The changes are scheduled to take effect on October 4, 2010. These changes increase borrower costs for using FHA financing. To avoid this cost increase make sure to start your FHA loan prior to October 4. It is worth noting that these changes will not affect mortgage insurance premiums on existing FHA mortgages.
Before going further, it is important to know that FHA MIP factors vary, and will continue to vary, slightly with down payment amount, 30 year fixed and 15 year fixed loan programs. This article addresses the most common FHA financing scenario, a minimum down payment of 3.5% with a 30 year fixed loan program. You’re welcome to email me at jedt at bankerspref dot com to ask about the MIP factors associated with your particular financing scenario
To establish a frame of reference to help gage the impact of these changes, let’s first review FHA mortgage insurance premiums (MIP) in general, then review current FHA MIP factors and lastly, compare the current MIP factors with the MIP factors that become active October 4, 2010.
FHA has two types of mortgage insurance, an Up Front Mortgage Insurance Premium (UFMIP) and an annual mortgage insurance premium (MIP). The current UFMIP is typically added to the loan amount (loan amount = purchase price – down payment) in the amount of 2.25% of the loan amount. The annual MIP is calculated with a factor of 0.55% and is paid monthly with the mortgage payment. FHA uses the proceeds from these two mortgage insurance premiums to fund claims on FHA insured mortgages.
Home Purchase Amount of $430,000
On October 4, 2010 the UFMIP factor for the aforementioned scenario drops from 2.25% to 1.0% and the annual MIP increases from 0.55% to 0.90%. The following table provides perspective on the actual dollar amounts of these changes with a $430,000 home purchase.
Here we see a reduction of the UFMIP by $5,187 and in increase in the monthly MIP by $121.03. More dramatic, is the total interest and MIP expense for the first 60 months of the loan. The MIP factors taking effect on October 4, 2010 will cost the homeowner an additional $5,891.
Home Purchase Amount of $750,000:
As the purchase price increases the dollar amounts increase. Let’s look at a $750,000 purchase.
Here we see a reduction of the UFMIP by $9,047 and in increase in the monthly MIP by $211.09 and an increase in total interest and MIP expense for the first 60 months of $10,275.
After October 4, 2010 FHA financing becomes much more expensive for the borrower. If you are planning to use an FHA loan program to purchase a home or refinance your home, it’s economically prudent to move quickly to avoid the increase MIP expense.
A copy of the memo can be found at the following link: http://portal.hud.gov/portal/page/portal/ver-1/HUD/federal_housing_administration/docs/August_Special_Edition_2_FromtheDeskOf.pdf.
If you have questions or if you would like to discuss your personal financing circumstances, you are welcome to email me at jedt at bankerspref dot com.