Surprise! The very first act of President Trump was to rollback the surprise FHA mortgage insurance reduction of a quarter of a percent. The reduction in the mortgage insurance rate had been announced on January 9, 2017. The announcement of the rollback was released just after the inauguration was concluded.
The FHA mortgage insurance reduction of 0.25% would have saved 2 million borrowers an estimated $900 per year, according to documentation written by the Department of Housing and Urban Development (HUD). For homes costing $185,000, the typical borrower would save $500. While $500 in savings doesn’t sound like a lot, when you’re a first-time buyer or someone who needs an FHA-backed mortgage in order to get approved for your loan, every penny counts.
Here’s a primer on how FHA mortgage insurance works: If you put down less than 20% on a home, a mortgage lender will require that you buy private mortgage insurance (PMI) that protects the lender in case you default. In the case of an FHA loan, the FHA’s mortgage insurance (often known as MI) protects the lender in the same way. The reason a buyer would opt for an FHA loan rather than a conventional loan usually comes down to credit scores and debt-to-income ratios: FHA accepts lower credit scores and often will allow borrowers to have a higher debt-to-income ratio than a conventional lender.
If you want to get an FHA loan, and your credit score is below 580, you’ll need to put down 10 percent of the purchase price. If your credit score is at least 580, you will be able to take advantage of even lower down payment options. However, the price you pay will include FHA mortgage insurance. There is an upfront premium of 1.75 percent of the loan amount, or $1,750 for every $100,000 you borrow. It can be financed into the loan amount. In addition, you’ll pay an annual premium which is paid monthly and is based on the loan amount, the lengthy of the loan and the loan-to-value ratio (known as the LTV). The premiums range from 0.50% for a 15-year fixed-rate loan with a down payment of 10 percent or more to 0.85% for a 30-year loan with a down payment of 5 percent or less.
The FHA mortgage insurance reduction had been supported by some in the real estate housing industry, including the National Association of Realtors (NAR). The NAR’s president, William E. Brown, expressed disappointment that some “750,000 to 850,000 home buyers will face higher costs, and 30,000 to 40,000 new home buyers will be left on the sidelines in 2017 without the cut,” he said in a statement. “We’re disappointed in the decision but will continue making the case to reinstate the cut in the months ahead.”
Keith Gumbinger, vice president of HSH.com, a mortgage rate website, said that he has seen a mixed response from the industry. “From my perspective, no one actively in the market at the end of December or early January was either expecting it or planning for it. Or perhaps more importantly, needed it to make their deal work. The 0.25 percent annual cut is only $250 year for a $100,000 loan, and about $21 per month isn’t all that much of an offset to the recent rise in rates,” he said, adding that it would probably have no real effect on purchase market, but a reduction might have generated a bit more activity in the refinance or streamline refinance department.
He suggested that the overall odds favor an FHA mortgage insurance premium reduction after the new administration had given the idea a “review.”
Other industry observers suggested eliminating the reduction was a prudent move, so that taxpayers wouldn’t be at risk for backing subprime mortgages. However, when announcing the mortgage insurance premium reduction earlier in January, the FHA noted that the MMI Fund Capital ratio (the level of capital reserves) had returned to a level that was above the 2 percent mandated by federal law for the second year in a row. It said some $44 billion has been added to the reserves. In its Annual Report to Congress, Former FHA Secretary Julian Castro noted that the reserve level now stood at 2.32 percent.
“This is the second year the Fund is meeting its statutory requirement to maintain at least a 2 percent capital ratio,” Secretary Castro wrote in the executive summary. “During FY 2016, the performance of the FHA’s portfolio continued to improve. In fact, the MMI Fund rate of seriously delinquent loans is among the lowest recorded in the past 10 years. Early payment defaults are historically low as well, and the credit quality of the portfolio remains strong,” he added.
This post was updated to reflect additional comments by Gumbinger.