It is now confirmed that FHA is set to change its mortgage insurance on October 4th 2010. There is good news, and bad news. The good news is that the Up Front FHA Mortgage Insurance Premium is being reduced, but the bad news is that the monthly mortgage insurance is going up.

I first talked about the FHA mortgage insurance changes here and then here. In some aspects things worked out better than I thought, but at the end of the day there is still an increase in cost to deal with.

The Upfront Mortgage Insurance Premium (UFMIP) will decrease from 2.25% to 1.00%. That is good news. On a $400,000 purchase price, with a 96.5% loan amount (FHA's minimum down payment is 3.5%) this equals a $386,000 loan amount. Under the old mortgage insurance the UFMIP was $8,685, under the new plan it will be $3860. Since you are financing a lesser amount, you are paying a lesser amount every month, to the tune of about $25 a month.

The Monthly Mortgage Insurance Premium (MMI) will increase from .55% to .90%. Using the above example, here is how those numbers would look:

Old method: $176.91 a month
New method: $289.50 a month

In this case you are paying an extra $112 a month over the old method. But you are saving $25 a month because you have a lesser UFMIP, so the net monthly cost is $87 a month higher. Not really the end of the world, but it is worth taking notice. Also, when you sell the house, you will owe less money on it now under the new method because you are financing a much lesser UFMIP, so the $87 a month extra gets paid back since you will owe less. The net effect is that this is not a huge change financially, but it is going to be an extra $87 a month to qualify for which will take an extra $3600 a year in income to qualify for. So it makes it a bit harder to qualify for the same loan amount under the rules.

Please note that this new law also gives FHA the authority to raise the Annual premium at will up to 1.55% for a 96.5% Loan-to-value loan.

To read this update in full from FHA click here.

I almost feel like there is no more PMI (Private Mortgage Insurance) on condos! But that is not true, there is PMI availability for condos, but it is getting harder to get. Most people know by now that PMI is needed on a Conventional loan if you have less than 20% down payment. I recently had a client who wanted to put 10% down on the purchase of a $600,000 condo. I first found out that on a loan that size ($540,000), which is a Conforming-Jumbo loan, that you cannot do a maximum LTV (loan-to-value) loan in a "declining market", which most banks are still defining DC and most of Northern VA as. So the buyers have to put another 5% down, and do a 15% down payment, or 85% LTV. This loan size ($510,000) is still a Conforming-Jumbo loan (which is defined as all loans from $417,001 to $729,250), and I found that no one will do PMI on condos that have Conforming-Jumbo loan amounts.

It seems you can only get PMI on condos that have Conforming loans (those which are $417,000 or less), and if those loans are in a declining market you cannot do maximum LTV financing (which is 95% LTV), so you'd need 10% down (or 90% LTV).

So it seems if you want to buy a condo in DC or Northern VA (or any market defined as a declining market) and need to borrow between $417,001 and $729,250, the only loan you can get is a 20% down payment Conventional loan or possibly an FHA loan.

And if you want to buy a condo and borrow $417,000 or less, you need a 10% down payment Conventional loan, or you can possibly go with an FHA loan for this too.

I am sure this will be changing moving forward, but it may take a while for the banks and PMI companies to loosen up.