San Diego Lifestyle

FHA Loan Requirements: Effective October 4th – Higher Annual & Lower Up Front Premiums.

It’s official, after a HUD letter on September 1st to Lenders that the FHA loan requirements are changing.

The first is an increase in the annual mortgage insurance premium (MIP).  If you want to know more about FHA loan requirements watch a video by Mark Robertson of Samuel Scott Financial.

Mark Robertson had the following to say about the FHA loan requirements:

HUD is changing the way the standard mortgage insurance works. Today on a 30 year fixed FHA mortgage, they charge two different types of mortgage insurance premiums (MIP). An upfront MIP often referred to as a “funding fee” of 2.25% of the loan amount, and a monthly mortgage insurance of .55% of the loan amount. The FHA loan requirements will lower the up front MIP to 1% of the total loan amount, and raise the monthly premium to .85%.

Before we talk about the change in FHA’s new mortgage insurance policy, lets take a minute to review what a loan would look like under the current mortgage insurance requirements.

The up front premium is almost ALWAYS financed into the loan. For example, lets take a base loan amount of $100,000. The upfront mortgage insurance premium is $2,250 or 2.5% of the $100,000 loan amount. That fee is added to the loan amount to make the total loan amount of $102,250. At a 4.5% interest rate on this loan of $100,000, the difference in monthly payment is only about $12/month more by financing this “up front mortgage insurance”. In addition to this up front mortgage insurance premium, there is also a monthly mortgage insurance of .55% of the loan amount. In our example of the $100,000 loan amount, this would add an additional $45.83 per month ($100,000*.55%=$550/year).

So, under the current FHA loan requirements policy if we took out a $100,000 FHA 30 year loan at 4.5%, our loan amount would be raised by the up front MIP of 2.25% to $102,250. This would make our principal and interest payment $518/mo. We would then add our monthly insurance premium of 45.83/mo for a total principal, interest and mortgage insurance payment of $564/mo. (Normally you would also need to pay taxes and homeowners insurance obviously, but for our example I am purposely leaving those out to simplify this exercise).

Now lets take a look at how this same loan would look under the new FHA loan requirements. Our base loan amount of $100,000 would be increased by the up front mortgage insurance premium of 1%, thus our new loan amount would be $101,000. It is important to note that building this $1,000 into the loan spreads that fee out over the life of the loan (30 Years), and the difference in payment each month from adding this fee to our loan in this example is only about $5/mo. Our principal and interest payment at 4.5% is $512/mo, which is about $6 lower than what our payment would be under FHA’s current mortgage insurance policy. We still have to add the monthly fee which is going from .55% to .85%. This is going to add an additional $70.83/mo ($100,000*.85%=850/year), which is $25 higher per month than it is currently. So, our new total principal, interest, and mortgage insurance payment is $583/mo. This is about $19 higher than what a buyers payment would be under FHA’s loan requirements.

Lets talk about what this means for potential buyers. Those who qualify for a home under FHA’s current mortgage insurance policy, may qualify for significantly less under the new policy. It’s important to move swiftly if a buyer is trying to maximize the purchase price of a home and take advantage of leveraging these historic low rates. There are many borrowers who are closing on homes right now, who would not be able to buy those same homes after the changes take place. In order to get FHA financing under the current Mortgage Insurance Requirements, the FHA case number has to be issued prior to October 4th, 2010, when the new policy goes into place.

If you want to reach Mark here is a link to his website – not only does he know FHA loan requirements but he is an expert at all types of financing.

Photo courtesy of Flickr

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