FHA-approved mortgage lenders were recently advised that a proposed decrease in FHA mortgage insurance rates has been suspended; this could mean that FHA mortgage insurance premiums will stay as they are or could be lowered or raised. What is FHA, and how does its mortgage insurance program impact home buyers and tax payers? The Federal Housing Administration, or FHA, is part of the U.S. Department of Housing and Urban Development also known as HUD. The FHA oversees a mortgage insurance program funded by premiums paid by FHA mortgage borrowers. FHA mortgage insurance programs are designed to be self-funding, but FHA can request premium increases if the MMI fund balance falls below the minimum cash reserves required by law. During the housing crisis, FHA reserves were severely depleted due to spiking mortgage defaults and foreclosures.
FHA mortgage insurance protects mortgage lenders against losses associated with delinquent payments and foreclosure of FHA insured home loans and provides a pathway to home ownership to those who cannot meet conventional mortgage approval requirements. Mortgages made on homes with less than 20 percent down payments require mortgage insurance that lowers lender risk. FHA reimburses insured lenders for losses incurred when FHA loans default. FHA mortgage insurance is also called mutual mortgage insurance or MMI.
FHA Mortgage Insurance Premiums Paid in Two Ways
FHA collects an upfront mortgage insurance premium, or UFMIP, at closing. Currently, the rate charged for UFMIP is 1.75 percent of the home's sale price; the UFMIP can be paid in full by borrowers at loan closing or added to the mortgage balance. Mortgage lenders can also advance the UFMIP and charge a higher interest rate. But that's not all.
Annual FHA mortgage insurance premiums are collected by mortgage lenders as part of borrowers' mortgage payments along with amounts collected for property taxes and hazard insurance. MMI premiums paid are sent to FHA and held in FHA's Mutual Mortgage Insurance Fund, which is used to pay lender claims on defaulted home loans. The MMI fund is legally required to maintain minimum cash reserves; if the MMI Fund falls below the required level, FHA mortgage insurance premiums can be raised to cover a shortfall.
FHA mortgage insurance premium rates are calculated using percentage rates established by the federal government. Current rates are 1.75 percent of your mortgage amount for the upfront premium; annual premiums are prorated monthly and calculated based on your down payment and loan amount.
How Much Does FHA Mortgage Insurance Cost?
Here's an example of how much initial mortgage insurance premiums cost based on a $250,000 purchase money mortgage. Your upfront MMI premium, based on the 1.75 percent rate currently used, would be $4,375.00. Annual MMI premiums based on a 3.50 percent down payment and an 0.85 percent rate, would be approximately $177.08 per month; as the loan balance decreases, your monthly premium amount gradually decreases. If HUD had lowered the annual MMI premium rate by 0.25 percent to 0.60 percent, the initial monthly premium amount added to your mortgage payment would be approximately $134.31, a potential annual savings of $513.41. Analysts said that 30,000 to 40,000 potential home buyers could be sidelined as the result of HUD's decision to suspend the 0.250 percent decrease in annual mortgage insurance rates, but this assertion doesn't include factors such as changing mortgage rates and variances in loan approval requirements.
FHA loans offer flexible terms and easier requirements for loan approval; discussing your needs with loan officers can help you decide if financing your home with an FHA loan is your best option.