Homebuyers seeking Federal Housing Administration insured mortgages will soon be able to take advantage of reduced costs.
The FHA yesterday said it’s cutting its annual premiums for mortgage insurance from 0.85 percent to 0.60 percent, a move the National Association of Realtors said would breathe new life into the program.
“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, a Realtor® from Alamo, California and founder of Investment Properties. “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.”
Following the Great Recession, FHA increased its monthly mortgage insurance premium from 55 basis points to 90 basis points. Then, by April 2013 it increased costs to a full 1.35 percent. The move reflected post-recession concerns over credit risk and the need to strengthen FHA’s Mutual Mortgage Insurance Fund. NAR research at the time, however, showed that the 80 basis point increase over that period priced between 1.45 million and 1.65 million renters out of the market.
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 (link is external).
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. Buyers with lower credit scores may find more favorable treatment with an FHA loan than a conventional product as well.
Reducing the MIP from 0.85 percent to 0.60 percent as was announced today, Brown said, means 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 thanked the leadership at FHA and the Department of Housing and Urban Development, but added that additional steps are required to better achieve FHA’s mission of serving creditworthy families. This includes eliminating FHA’s “life of loan” mortgage insurance requirement, which forces borrowers to maintain mortgage insurance on an FHA-insured property regardless of their equity position. Borrowers with traditional mortgage insurance can typically extinguish their mortgage insurance once they reach 20 percent equity in the property.
“HUD and FHA leaders are to be commended for recognizing the need we have before us,” Brown said. “Our work continues, but we’re encouraged by today’s announcement.”