FHA to Cut Fees on Mortgages
President Obama announced today that the Federal Housing Administration (FHA) will cut annual mortgage insurance premium fees on loans it insures to make home ownership more affordable for borrowers, by reducing the rate from 1.35% to 0.85%. The White House says that the reduction on average will amount to a $900 decrease in the annual mortgage payment for first-time homebuyers.
This change in premiums is welcome news for many borrowers. According to NAR, nearly 234,000 creditworthy borrowers in 2014 were priced out of the housing market because of high FHA insurance premiums. This change means that prospective borrowers will be able to obtain approval for higher mortgage loan amounts than they would have prior to the cut taking effect.
Although FHA does offer a 3.5% down payment option, up until this change it was much more expensive to get an FHA loan because of upfront premiums and the high annual mortgage insurance premium.
Home buyers who use FHA loans pay an Upfront Mortgage Insurance Premium of 1.75%. It’s called an upfront mortgage insurance premium because you pay it upfront at closing. Because it’s added to your loan balance, you pay interest on it for the life of the loan.
You must also pay an Annual Insurance Premium each month on an FHA loan. FHA started to add fees to its mortgages in 2013 in order to offset the cost from the surge in home defaults after the housing crisis. The continued increase in fees—which are currently three times what they were just a few years ago— shut out a huge portion of the home buyers– especially first time buyers– who seek FHA loans because of the low down payment requirement and less stringent loan requirements.
Last month, FHFA announced the return of the 3% down payment mortgage for conventional loans backed by Fannie Mae and Freddie Mac, which don’t have insurance premium fees. This meant conventional loans were then cheaper than FHA loans. It is clear that FHA recognized this and knew they could no longer compete if Fannie and Freddie were also offering a 3% down product.
2014 had fewer first time buyers than any other year since 1987. Historically first time buyers account for over 40% of all home sales. In 2014 they were only 27% of home sales. This negatively impacted the overall sales and played a big part in making 2014 a down year for home sales compared to 2013.
In response, FHA will now be cutting fees to attract more borrowers.