The Federal Housing Administration (FHA) is planning to announce multiple changes this week to avoid needing a taxpayer bail-out. The 78 year old administration may be in need of a bail-out for the first time ever, owing to delinquencies on loans that it insured in the past few years. The agency reported a $16.3B deficit to the Congress in November.
FHA is a Government Sponsored Entity that insures or guarantees loans to insure liquidity in the secondary market. Loans that meet FHA guidelines are insured by FHA to protect the lender against default.
To manage the program, FHA charges an up-front and an annual mortgage insurance premium (MIP) from the borrower. Borrowers are however currently entitled to cancel the MIP when the loan balance drops to 78% or the MIP is automatically cancelled when the balance drops to 78%. The cancellation of MIP absolves the borrower from paying premium leaving FHA to still pay the lender if the borrower defaults post MIP cancellation.
Large scale defaults in the past few years have depleted the FHA of its MIP funds that are needed to sustain the program, creating a situation calling for the large scale changes that will be coming soon.
Hike in Mortgage Insurance Premium
FHA annual mortgage insurance premium will go up by 10 basis points. For Jumbo loans (Loans above $625K and up) the premium will go up by 5 basis points. Currently, the maximum MIP for loan amounts under $625,500 is 1.25 percent and for – loan amounts greater than $625,500 it is 1.50 percent. To illustrate this increase, for a $300,000 loan amount, monthly payment will go up by $25 and for a $700,000 loan amount, it will go up by $29 per month.
Reversal of Mortgage Insurance Cancellation Policy
FHA will reverse the FHA Mortgage insurance premium cancellation policy which comes into effect when the loan balance drops to 78%. Borrowers will now continue to pay annual mortgage insurance premium on the unpaid principal balance for the life of the loan. As a borrower, what this means for you is that the only way you will ever get rid of MIP is by refinancing into conventional mortgages. You can also consider an 80/10/10 loan.
Change in automated underwriting rules
Borrowers with FICO scores of below 620 and DTI > 43% will not be underwritten through the automated underwriting system thereby needing a manual underwriting by the lender. To compensate for low FICO and high DTI, the lender will need to supplement with other factors.
Increase in Minimum Down Payment for Jumbo Loans
The minimum down payments on loans between $625.5K and $729K will go up from 3.5% to 5%.
The good news is that these changes will be effective with case numbers assigned on or after – April, 1, 2013. Keep in mind that case numbers are usually assigned within a day or two of loan application. If you are considering an FHA loan program, you might want to start your application prior to that date. This way you will be eligible for current FHA MIP rate and still be able to cancel your mortgage insurance.