FHA Update: Down Payment And Mortgage Insurance
Posted by Kevin Kueneke | Visited 1492 times, 1 so far today | Currently 1 Comment »
We finally have some clarification regarding the effective dates of the new Federal Housing Administration (FHA) down payment requirement as well as the new FHA Upfront and Monthly Mortgage Insurance Premiums.
As many of you will remember, FHA is increasing their minimum investment from the buyer from 3.0% to 3.5%. There were rumors that this was going to be effective October 1st, 2008. We now know that January 1, 2009, is the effective date for the down payment increase. 
FHA mortgage insurance, on the other hand, is changing effective October 1, 2008.
For purchase transactions, FHA has both a onetime upfront mortgage insurance premium (UFMIP) as well as monthly mortgage insurance (MIP), except for loan terms less than 15 years combined with a down payment of 10% or more.
The following is a breakdown of the new mortgage insurance for purchase money transactions with FHA case numbers assigned on or after October 1, 2008:
Loan Term > 15 Years
Loan to Value Upfront Premium Monthly Rate
<=95.00% 1.75 0.500
> 95.00% 1.75 0.550
Loan Term < 15 Years
Loan to Value Upfront Premium Monthly Rate
<=90.00% 1.75 None
> 90.00% 1.75 0.250
So how do these changes affect the typical home buyer? Most FHA loans fall into the category of less than 5% down payment and a loan term greater than 15 years. This makes sense since most first-time home buyers are looking for the least amount of down payment and the lowest monthly payment.
The old upfront premium was 1.5% of the base loan amount (base loan calculated using sales price minus down payment for this example, the actual calculation is slightly more complicated), and the old monthly insurance amount was 0.50% of the base loan amount divided by twelve months. Let’s look at a property with a sales price of $350,000:
Base Loan Amount: $339,500
Old Monthly Mortgage Insurance: $141.46
New Monthly Mortgage Insurance: $155.62
Difference of roughly $14.16 per month.
Old Upfront Mortgage Insurance Premium: $5,092.50 (of which $5,050 can be financed)
New Upfront Mortgage Insurance Premium: $5,941.25 (of which $5,900 can be financed)
If these amounts are financed, the difference in the payment at today’s 30 year fixed rate of 5.875% would be $5.03 per month. Add that to the slightly higher monthly mortgage insurance, and you are looking at just over $19 more per month with the new numbers.
An additional $19 per month is still relatively small considering FHA’s more lenient credit guidelines and down payment requirements. FHA is more strict though regarding the condition of the property versus typical conventional financing, helping to assure that the property is in a reasonable and safe condition.
With the new, higher FHA loan limits, FHA is taking more risk. As with any insurance whether it be auto, home, or mortgage, higher risk goes hand in hand with higher premiums. I think an extra $19 per month is worth paying to keep this program around.
Do you have a specific example you would like to discuss? Please feel free to call me at (760)500-1919 or email me: Kevin@MyCWMtg.com
Great article giving us a clear understanding of what’s going on with FHA. I know a lot of people are very confused about the new guidelines and what it means to them. I am still working on getting caught up on everything and I appreciate your blog. Very informative.