A long expected shakeup in the way FHA calculates its Mortgage Insurance Premium is expected to take effect on September 7th, 2010. (*UPDATE: I now hear FHA will make these changes on all new FHA loans effective October 4, 2010). I first wrote about this here. Now the proposed changes have taken on a new cost structure. FHA officials say the agency needs to stabilize its finances, which have deteriorated because of the foreclosure crisis. The extra fees are projected to bring in an extra $3.6 billion per year.
As part of H.R. 5981, FHA will be reducing the amount of the Upfront Mortgage Insurance Premium (MIP) from 2.250% to 1.000% (although there is language in the bill that may hike this as high as 1.55%). But they will also be increasing the Annual Premium that is used to calculate the monthly mortgage insurance from .55% to .90%. Below is an example of how this affects someone planning on getting an FHA loan after September 7th 2010:
Current Calculation:
Sales Price: $300,000.00
FHA Base Loan Amount, using the 3.5% minimum down payment: $289,500.00
Upfront MIP: $6,513.75 (2.250%)
Adjusted Loan Amount to include the financed MIP: $296,013.00
Mortgage payment at 4.5% = $1499.85
Monthly MIP: $132.68 (.55% Annually)
R/E Taxes: $275.00
Hazard Ins.: $55.00
Total Payment: $1,962.53
Required Annual Income: $81,208.00 (using a 29% Housing Ratio)*
September 7th 2010 Revised Calculations:
Sales Price: $300,000.00
Base Loan Amount: $289,500.00
Upfront MIP: $2,895.00 (1.000%)
Adjusted Loan Amount: $292,395.00
Mortgage payment at 4.5% = $1481.52
Monthly MIP: $217.13 (.90% Annually)
R/E Taxes: $275.00
Hazard Ins.: $55.00
Total Payment: $2,028.65
Required Income: $83,944
The net result is a higher monthly payment of $66/month, resulting in additional annual income to qualify of $2,736, which is approximately a 3.4% increase in income needed to qualify.
Conclusion
FHA may spin this as having reduced the Upfront MIP to the consumer to help promote home ownership. However, the only result that matters is it will now become harder for people to qualify, and the monthly payment will increase.
I’ll report again after September 7th 2010 when the bill is signed into law, and we’ll know that the above is the new law of the FHA mortgage jungle.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
This MIP increase will go into effect on Oct 4,2010, and only see talking about for people who want to buy new home. Now what about people who already have FHA loan, will MIP increase also?
The FHA mortgage insurance increase will only affect new loans as of the change date. No existing FHA loans will be affected.
All the to-do about the MIP changes, and nobody seems concerned about the tax deductability of these fees expiring in 2010???
That is true, but the deductible nature of mortgage insurance has been threatened before, and then extended after debate. I am hoping Congress sees that the real estate market needs no more shocks right now, and should keep mortgage insurance deductible for now.
There are limits to how you can deduct mortgage insurance, income limits for example, that you can search and read about on the IRS website.