One, in reversing the long-established policy of a “prior Administration” that FHA mortgage insurance (MIP) is cancelled at 78% of the original value,
FHA will require that the MIP remain on all FHA loans for as long as the loan is an FHA-insured loan. In other words, the MIP remains until the mortgage is paid off entirely. The reason for the change is straightforward: FHA loans carry the insurance for the life of the loan but the payment for the insurance ends at 78% of the original value, so FHA has faced foreclosures that have no insurance premiums still being paid, harming the insurance fund.
Unfortunately, carrying the MIP for the life of the loan will impair the finances of the borrowers FHA strives to help. I have written to the head of FHA with the suggestion of an alternative to this drastic step: have the loans originated with an end to the FHA insurance (such as today's 78% LTV) that will coincide with the end of the charge for MIP. It doesn’t have to be at 78%; it could be 75% or 70%, as long as the lender agrees to the removal of the insurance at the agreed LTV. This is how private mortgage insurance works and is quite easy to implement.
The second surprise is that HUD expressed the intent to increase the annual MIP another .10% (10 basis points). This comes on the heels of periodic increases since the real estate crisis began. It is designed to increase FHA’s capital levels, which have fallen dangerously low due to foreclosures of loans originated prior to 2010. Loans since that time perform well and are actually adding to FHA’s capital position.
The dates of these changes are loosely described as “2013”, so at this point it’s a good idea to let buyers, as well as family or friends who might look to refinance to a new FHA loan, know that it’s wise to take action soon. With FHA financing, the transaction only needs to be started (having the FHA case number) in order to lock in the existing structure.
FHA’s Changes effective 4/9/12:
To see the FHA
MIP and UFMIP Rate Changes
that went in effect on April 4th
2012, please see