FHA To Raise Mortgage Insurance Premiums On April 1,2012

Because of the continuing decline of the FHA insurance fund, not to mention projected futher losses; the Federal Housing Administration has decided to increase their monthly fee as well has the upfront mortgage insurance premiums.

FHA will, once again, raise its mortgage insurance premiums April 1, 2012. All FHA mortgage applicants; first time buyers and repeat buyers will incur the higher upfront and monthly fees.

Click here to see if you qualify for an FHA mortgage loan

It has recently been announced by President Obama that the FHA Streamline is not going away, as previously rumored. The FHA Streamline is a program that lets borrowers who pay their mortgage on time to take advantage of lower interest rates without having go through the qualification process if they are lowering their payment by 5% or more or move from an adjustable rate to a fixed rate

The announcement about the proposed MIP increase was made February 27, 2012 and will be official once FHA releases what is known as a “Mortgagee Letter“.

FHA is not a lender They encourage Banks to lend money by offering insurance against losses they may incur due to lending to higher risk borrowers. When the subprime crisis occurred in 2007 and 2008, many lenders stopped offering subprime loans and instead pushed borrowers into FHA insured loans. It is the opinion of many who are investigating the FHA originated loans from 2008 to 2010, that many of the borrowers either committed fraud or the originator and their team committed fraud in order to obtain the loan. In addition, due to our economy, many were laid off of work or suffered other setbacks that impacted their ability to maintain their mortgage. This resulted in a higher than normal numbers of claims that resulted in the FHA insurance fund to be at record lows with potenially need a government bail out.

In order to answer the call of many Congressional law makers, FHA continues to raise premiums to increase the funds reserves. Due to this pressure this will be the fourth time in three years these increases have accured.

FHA requires two premiums; an “Up Front” and a “Monthly”. The up front, or in industry jargon, the UFMIP (Up Front Mortgage Insurance Premium) will increase from 1% of the loan amount (The “Base Loan Amount” is factored by taking the purchase price or appraised value, whichever is less and multiplying it by 96. 5%. This because FHA requires a 3.5% down payment to 1. 5% down payment) to 1. 75% for all loans submitted on or after 1/1/2012

This is for standard FHA loans. There maybe other premiums in regards to high risk.

This 1. 75% UFMIP may be paid at the time of closing. However, for most, this makes no sense and defeats the purpose of using the FHA low down payment program. Instead, most will finance this amount over 30 or 15 years.

Here is how it looks; As mentioned above, the “Base loan amount” is factored by taking the agreed upon purchase price, or the appraised value, whichever is less (Lenders will never lend more than the appraised value of the home) and multiplying this by 96. 5% For example; $100,000 * 96. 5% = $96,500 base loan amount. To come up with what is referred to as the “Total Amount Financed” you take the UFMIP factor of 1. 75% and multiply it by the $96,500. Ie; $96,500 * 1. 75% = $1,688. 75. Then, you add these two figures together; $96,500 + $1,688. 75 = $98,188. 75, this number is what is known as the “Total Amount Financed” (This figure is of course rounded).

When looking at the difference between the old and the new $965 versus $1,688, the extra $723 may not sound like too much of a burden. However, when you view this at $500,000, the extra . 75% appears a bit more painful. $500,000 * . 75% = $3,750, financed over 30 years = $6,840 additional cost to borrow.

A few points to ponder

• In 2006, FHA made up less than 3% of all the loans originated in the US. Today, FHA now backs over 40% of all new mortgages. FHA also lends to a higher percentage of African Americans and Hispanic borrowers, as well as younger, credit constrained borrowers, contributing to the increase in home ownership among these groups.

• All of America has benefited directly or indirectly to a boost in the overall economy through the increase in home-ownership due to FHA’s existence.

• Some have said that borrowers should put more money down and homeownership is a privilege, not a right. While this is a true statement, one must remember that FHA and VA loans performed extremely well since their inception. FHA was created due to the banking system collapsing after The Great Depression and literally saved housing for America. It is a great self-funding program that has been strained due to the private banking sector abusing it, not because it is inherently flawed.

• The National Association of Real Estate Brokers (NAREB) as well as other groups, was instrumental in passing the Fair Housing Act of 1968. Prior to this act, banks would do what was known as “Redline”. This was a practice of not lending in minority communities, which as one can imagine, had a devastating effect on home values in these areas as well as a massive disadvantage towards minorities’ ability to pass on wealth to the next generation.

• Another point many overlook is the fact that the insurance fund also funds HUD projects. Many of these projects are controversial. Some have been dismal failures while others have been successful as a positive safety net for segments of our society. Understanding where these premiums go and how they’re applied may make paying them for those that can afford it, more tolerable.

with contributions from C. Nassief