The Department of Housing and Urban Development announced the reduction of the FHA Mortgage Insurance Premium (MIP) today. The reduction of 30 basis points makes it less expensive for a borrower to own a home. The down payment hasn’t changed but the cost of the monthly mortgage insurance has decreased putting more money back in the homeowners’ pockets, making homeownership more affordable.
For example, on a $400,000 home with the previous rate of 0.85% and the minimum downpayment of 3.5% the monthly mortgage insurance premium would have been $273.42 additional to the mortgage payment. With the premium now at 0.55%, it reduces the MIP portion of the payment by $96.50 to $176.92. In this instance, this is an annual savings of roughly $1,200 a year.
The FHA cut the annual mortgage insurance premium fees in 2015 from 1.35% to 0.85% for LTV >95%. A 2017 adjustment was in the works but was suspended and never placed in effect. This newly announced reduction for loans with Loan to Value (LTV) <95% will reduce the annual premium from 0.85% to 0.55%.
It should also be noted that FHA loan limits were recently increased for 2023 to reflect the rapid ascent of home prices thus enabling more properties to qualify for FHA financing.
This adjustment of has been urged by the National Association of REALTORS, Mortgage Bankers Association, Manufactured Housing Institute, and the National Association of Builders in a letter to the National Economic Council last September.
“Against the backdrop of robust FHA capital reserves and rapidly deteriorating affordability, it is critical for the Administration to ensure low to moderate- income and first-time homebuyers are not left behind. Lowering the MIP [Mortgage Insurance Premium] – with a focus on FHA’s recurring “annual” premium — increases homebuyers’ purchasing power by reducing monthly payments and directly putting money into their pockets every month, giving them the opportunity to become homeowners and build generational wealth. As economic conditions continue to worsen, reducing the MIP also allows borrowers the flexibility to spend on necessary items like food, gas, education, and other monthly bills.” Coalition Letter to the National Economic Council
This letter, on behalf of future FHA borrowers, addressed rising rates, rising prices, buyer affordability, inflation, and the fact that the FHA’s Mutual Mortgage Insurance Fund (MMIF) has a capital reserve ratio of more than 8%, four times the minimum. The current 8% reserve is a sign that a reduction can be done but history points out that it’s subject to significant decline which is a risk factor for this reduction. Furthermore, FHA’s delinquency rate is back to pre-pandemic lows, though “approximately 345,000 homeowners remain on COVID-driven forbearance plans with their mortgage servicers. At least 137,000 of those borrowers have FHA-insured loans,” according to HousingWire.
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