Lowered costs this year
The Federal Housing Administration (FHA) announced today a cut to annual premiums for mortgage insurance (MIP) from 0.85 percent to 0.60 percent, a move which many anticipated but waited with held breath just in case.
When a homeowner is part of the FHA mortgage program, they pay MIP at closing (currently a 1.75 percent fee) and then in 12 monthly installments annually, so this reduction will make a wide impact.
The National Association of Realtors says this reduction “breathes new life into the program.”
Putting homeownership back within reach
“FHA mortgage products exist to serve an important mission: providing homeownership opportunities to creditworthy borrowers who are overlooked by conventional lenders,” said NAR President William E. Brown. “The high cost of mortgage insurance has unfortunately put those opportunities out of reach for many young, first-time- and lower-income borrowers. Now, we have a real opportunity to get back on track.”
NAR notes that post-recession, the FHA had increased MIP from 55 basis points to 90 basis points, then to a full 1.35 percent by April 2013. The increases reflected concerns over credit risk and the need to strengthen FHA’s Mutual Mortgage Insurance Fund (MMIF).
Research by NAR indicated at the time that the 80 basis point increase over that period priced somewhere between 1.45 million and 1.65 million renters out of the market.
In a statement from NAR, the trade group noted that since then, “the MMIF has shown continued good health, including achieving a much-watched capital reserve ratio of over 2 percent for two years in a row. In light of that strength, NAR applauded FHA’s move in January 2015 to reduce premiums to 85 basis points, and since then has advocated for a further reduction.”
It’s just math
NAR notes that FHA mortgages are important for low- and moderate-income buyers in particular because a lower down payment is required than with many conventional mortgage options. Lower credit scores have a better chance of favorable treatment with an FHA loan compared to a conventional product.
Brown notes that most importantly, this means the FHA will represent a viable option for more borrowers.
“This is a question of simple math,” Brown said. “Every time we cut the cost of mortgage insurance it means more borrowers meet the debt-to-income ratio required to purchase a home. It follows that dropping mortgage insurance premiums today will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA. That puts more money in the fund to protect taxpayers, and it puts more families in homes so they can live out the American dream.”
Brown concluded, “Our work continues, but we’re encouraged by today’s announcement.”