Housing and Urban Development (HUD) announced today that FHA mortgage insurance premiums for loans insured by the Federal Housing Administration will be reduced in order to expand access to affordable home financing to more families.
FHA-insured mortgages are loans made by private companies that have a government-funded mortgage insurance policy paid for by the borrower that protects the lender from loss in the event of a default on the loan.
FHA-insured mortgages were popular because they allowed only a 3.5% down payment (compared to 5% for Fannie Mae and Freddie Mac until recently), carried lower monthly insurance premiums than conventional loans with the same loan-to-value ratio, and carried a slightly lower interest rate than conventional loans.
In addition, FHA mortgage insurance allowed for more credit bruises than conventional loans. In fact, with conventional underwriting guidelines getting tighter over the last few years FHA loans became the default loan for borrowers with bruised credit who were otherwise creditworthy.
In return there was a large up-front mortgage insurance premium paid when the transaction closed, monthly mortgage insurance premiums, and the FHA mortgage insurance had to be carried for the life of the loan, rather than until there was enough equity in the property to remove it.
The move to reduce FHA mortgage insurance was triggered by a desire to expand access to reasonable financing and the success of HUD in recent years in significantly reducing losses from defaulting loans.
According to an article in CNN Money “In the wake of the financial meltdown and ensuing foreclosure crisis, FHA raised its mortgage insurance premiums to shore up its finances. But now home values are on the rise, the jobs picture is improving, and foreclosures have fallen to their lowest level since 2006.
Last March, the FHA announced it would not need another bailout due to improving financial conditions. The White House said that even after lowering premiums, reserves in the fund are projected to grow by $7 billion to $10 billion annually. “
With the FHA mortgage insurance fund now healthy and getting stronger, and a weakening housing recovery that most analysts agree could benefit from a little support, now seemed the right time to reduce the cost to home buyers.
The new premium schedule will take effect later this month, and FHA expects to publish a new fee structure shortly. Word on the streets is that the annual premium will be reduced by 0.50% across the board for 30 year loans, a savings of $2,000 per year, or $167 per month on a $400,000 loan.
(Update: HUD published the new fees in a bulletin on 1/9/2015. It’s official!)
There was no announcement regarding a change in the policy requiring that FHA mortgage insurance be retained for the life of the loan, but look for that later this year.
With conventional loans now requiring only 3% down, and FHA loans getting more affordable, home buyers have more (and more attractive) financing options in 2015. You will still get the best financing with 20% down, good credit, decent liquid reserves, and stable, verifiable income. But if you don’t have those things, you might be able to start shopping.
To read the press release from HUD, click here.