FHA is Changing The Rules of Mortgage Insurance

On October 4th, Your FHA Buying Power is Going Down.

FHA loans will have higher monthly payments after October 3rd due to rule changes regarding Mortgage Insurance (MI). Both Upfront and Monthly MI are changing.

For example, this means that if you can afford a $225,000 house today, you will only be able to afford a $216,500 house in October.

The Good News: Upfront MI, which is usually added onto the loan amount, is going down from 2.25% to 1.0%. Since this cost is usually added onto the total loan amount, your total loan amount will be noticeably lower.

The Bad News: Monthly MI, which used to be determined by a factor of .55, is going up to .90. That means a monthly amount equal to 90 cents for every thousand dollars on the loan. This affects the monthly payment. For most borrowers taking advantage of the low down payments of FHA insured loans, the monthly payment usually has more impact than the total amount of the loan.

Let’s look at a home that you want to purchase for $225,000. The FHA down payment of 3.5% would be $7,875, leading to a base loan amount of $217,125. The Upfront MI will actually reduce from $4,885 to $2,171. Remember, this amount is added to the loan, and results in a monthly payment about $13 less. However, the Monthly MI will increase from $99.52 to $162.84.

This all comes down to a monthly payment, including principal and interest plus MI, of $1,273.98, which is about $50 more per month than current rates. This is a reduction in your buying power, and results is the rough equivalent of being able to buy a house for $225,000 now or only being able to afford a $216,500 house after October 4th. Of course, these numbers will change for different loan amounts, so please let me know if you have any questions.

Argh…it is hard to write narratively about numbers. So….if you would like a handy flyer with an easy-to-read chart, please let me know and I can send it along.

Now, it is not too late to get the current FHA MI payments.

Your FHA loan doesn’t have to be complete by October 4th, but it must have an FHA Case Number, and an FHA Case Number can be obtained once your offer to buy is accepted.

This is a complicated issue to write about, so please let me know if you have any questions. This is an important change for a popular loan product, and I want you to know more about it. Thanks to Kristin Brown at Mortgage Trust for her valuable information and guidance on this topic.