Important New Changes – FHA to Increase the FHA Monthly Mortgage Insurance (MMI)

Sit down and take a breath, here we go again, FHA has raised the annual mortgage insurance premiums which is known as the FHA monthly mortgage insurance. These changes are mentioned in Mortgagee Letter 11-10 and become effective on or after April 18th, 2011. The new change is 25 bps or .25%.

Now remember that we just had an increase by FHA that went into effect in October of 2010. ALSO, keep in mind that Fannie Mae (Conventional Loans) has a pricing change that goes into effect on April 1st, 2011 as well.  And there is talk about conventional loans requiring 10 percent down, not 5 percent down. But there seems to be no foreseable changes for FHA loans and the minimum down payment of 3.5 percent for now.

 Why the changes? HUD wants to strengthen the FHA's Mutual Mortgage Insurance Fund, known as the MMIF. They want to see the fund financially sound. Also, there is no change to the Upfront Mortgage Insurance Premium of 1 percent.

FHA Commissioner David Stevens commented:

“After careful consideration and analysis, we determined it was necessary to increase the annual mortgage insurance premium at this time in order to bolster the FHA’s capital reserves and help private capital return to the housing market.  This quarter point increase in the annual MIP is a responsible step towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain the most cost effective mortgage insurance option for borrowers with lower incomes and lower down payments.”

HUD claims that this change to upfront MIP charges will increase the capital reserves the FHA holds in the Mutual Mortgage Insurance Fund by $3 billion, greatly increasing the stability of the FHA, which had $3.6 billion in the account at the end of 2010.  According to the press release, new FHA borrowers will pay about $30 extra per month on average.

Old verse New Monthly Mortgage Insurance Changes

 

This chart is from Mortgagee Letter 11-10 - Annual Mortgage Insurance Premium Changes -

 As you can see by the red arrow, indicating that this goes into effect on April 18th, not April 4th. HUD must have revised the date after they did the charts. So what does this all mean to those refinancing or buying new homes with a FHA mortgage?

 

This is based on a $250,000 sales price and the end result is that it would cost the buyer $50.26 more in their total mortgage payment. You can also look at it from the flip side when qualifying buyers. This could lower the new buyers purchasing power by about $9,000. Meaning, instead of the $250,000 purchase price in the example, they can now afford a $241,000 home.

 This new change is for your primary 1 to 4 unit properties. This change does not affect Title 1 loans, the HECM loan (reverse mortgages - which I am writing about tomorrow), the HOPE loan, and a few other types of FHA loans. This can also be found in the new FHA mortgagee letter 11-10.

There are also new changes to how one would have to request a FHA case number, cancellations of FHA case numbers, and a few other issues. These changes can also be found in the new FHA mortgagee letter 11-10.

 Here is a quick breakdown of different purchase prices just to give you an idea on how it will change the monthly payment.