If you’re considering an FHA Loan for your next home purchase, we’ve got some great news for you. According to an official announcement from the Federal Housing Administration (FHA), the annual premiums most borrowers have to pay on FHA loans will be lowered, saving new FHA borrowers an average of $500 in 2017.
According to a Jan. 9 press release from the U.S. Department of Housing and Urban Development (HUD) the FHA is lwoering its annual mortgage insurance premium by 25 basis points (a quarter of a percent) for most new FHA mortgages with a closing/disbursement date on or after January 27, 2017.
The reason for the reduction, according to HUD’s press release, is the strengthening value of the FHA’s Mutual Mortgage Insurance (MMI) Fund, which has gained $44 billion in value since 2012.
“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” said U.S. Housing and Urban Development Secretary Julián Castro. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”
“We’ve carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers,” added Ed Golding, Principal Deputy Assistant Secretary for HUD’s Office of Housing. “Homeownership is the way most middle class Americans build wealth and achieve financial security for themselves and their families. This conservative reduction in our premium rates is an appropriate measure to support them on their path to the American Dream.”
More Info on the FHA’s Mortgage Insurance Premium (MIP)
One of the things that make the FHA Loan program so popular is its low down payment requirement and low minimum FICO score. These features not only make FHA loans more accessible, they make them more affordable. With a conventional mortgage, borrowers have to pay 20% down to avoid paying costly private mortgage insurance (PMI) and may have to have a higher credit score to secure a low interest rate. By contrast, FHA Loans allow borrowers to pay as little as 3.5% down and FICO scores as low as 580 (or possibly lower with 10% down). These more lenient and affordable features do come at a cost, via the FHA’s mortgage insurance premiums.
FHA Loan borrowers can finance more than 80% of the home value (pay less than 20% down) and not pay expensive PMI; however, they do have to pay the FHA’s mortgage insurance premiums. Yes, premiums – plural. One is an upfront premium charged as a one-time fee to the borrower at closing. The other is the annual premium and its cost is spread out over the course of a year (though usually paid monthly) for the entire life of the loan. The FHA’s announcement to lower its mortgage insurance was in reference only to the annual MIP.
The purpose of the FHA’s mortgage insurance premiums is to help keep the program going by supporting the FHA’s Mutual Mortgage Insurance (MMI) Fund. The MMI Fun is sort of like an emergency savings account for the FHA’s loan program. If an FHA borrower stops paying their mortgage, their lender can file a claim with the FHA’s insurance and the FHA uses money from the MMI Fund to cover some or all of the lender’s losses.
During the economic downturn and after the housing bubble burst, there was a great increase in the number of claims filed with the FHA’s insurance. This threatened the strength of the MMI Fund. To remedy this and help replenish the MMI Fund, the FHA raised its MIP. Now that the economy has recovered, the housing market has returned to a level of normalcy, and the MMI has had four straight years of growth, the FHA determined it is time to bring the premium back down, helping working households find affordable home financing.
If you’re interested in learning more about FHA Loans, we invite you to explore our FHA page and contact us with any questions. If you’d like to request more information and receive a free rate quote, simply complete the form on this page and one of our mortgage professionals will contact you after reveiwing your information.