Last week, President Obama and HUD announced a reduction in the mortgage insurance premium (MIP) fees charged on FHA loans. Most FHA borrowers, both current and future, stand to benefit from the lower fees. Here's a loan officer's perspective on the impact:
FHA loans had officially become the last resort for my buyers. Between the large upfront MIP (mortgage insurance premium) of 1.75%, the onerous annual MIP cost of 1.35%, and the fact that MIP now lasts for the life of the loan, the only borrowers I recommended FHA to were those unable to qualify for a Fannie or Freddie loan. It wasn't surprising that FHA loan volume had fallen off dramatically, in fact, it was predictable.
Whether it's weirdly coincidental or purely reactive, HUD's decision to lower annual MIP costs by .5% comes as Fannie/Freddie launch 3% down payment loans, an option likely to siphon off FHA buyers with good credit. The bottom line? FHA borrowers win all around with Friday's announcement, whether they're buying homes or currently have an FHA mortgage.
In the past, FHA clients could easily reduce their payments when rates dropped with a streamline refinance. There was a new upfront mortgage insurance cost, but the savings typically justified paying it. For years, that was one of the big benefits for my FHA borrowers. They didn't need an appraisal, paystubs, or tax returns for a streamline; all it required was a timely payment history and the normal paperwork. As MIP costs rose though, streamlines became less of an option. FHA borrowers who lacked equity couldn't refinance to conventional loans, and often couldn't save enough with a streamline to justify refinancing, so many lost out when rates hit historic levels in 2013. Fortunately, that will no longer be the case.
At the moment, most borrowers with $200,000 FHA loans pay 1.35% of the loan balance in annual MIP costs ($2700/year, or $225/mn). When MIP rates drop (for case numbers issued 1/26 or after), their new cost will be $1700/yr, or $141.67/mn. Saving $84/mn in MIP is significant, but doesn't happen automatically.
FHA borrowers who want the lower MIP costs will need to do a streamline refinance. The best news of all? With current rates near the lows of 2013, most borrowers will also lower their interest rates while streamlining. If that same $200,000 borrower goes from 4.5%, to 3.75%, he'll save an additional $70 or more per month!
Fortunately, the requirements for a streamline are minimal: at least 6 payment made on the current loan; no more than 1 payment 30 days late in the past year, and none in the past 6 months; a credit score that meets lender requirements (which range from 580 to 660); and a verifiable source of income. While FHA doesn't require lenders to assess income on streamline loans, many do. Anyone turned down for a streamline due to insufficient income or credit score should investigate other lenders. There's still no appraisal required, which lowers costs and removes concerns over homes' value.
HUD's upfront MIP charge of 1.75% does apply on streamlines, but can be added to the loan balance. Borrowers who closed on their existing loan in the past 36 months also get partial refunds of their previous premium, which helps offset the new cost. Typical closing costs apply as well, but can't be added to the loan, and are often paid by the lender.
The bottom line as I see it? FHA loans are now competitive with Fannie/Freddie's 3 or 5% down options, particularly for borrowers with scores below 720 (since PMI costs for conventional loans vary with credit scores). Current FHA borrowers suddenly gained a great opportunity to save. Those who closed after June, 2013 stand to benefit the most. They'll lower their mortgage insurance costs and most likely their rates too.