The Department of Housing and Urban Development (HUD) has altered the fee structure for FHA loans, which increases the annual “mortgage insurance” payment. The changes went into effect on April 1, 2013 and June 3, 2013.
The FHA loan program is designed to help middle- and low-income borrowers buy a home by allowing lower down-payments and more flexible qualification requirements. As part of the loan structure, the FHA requires both an annual “mortgage insurance” payment (MIP) and an “upfront insurance premium” (UFMIP).
The FHA loan requires a 1.75% upfront premium, which is calculated against the base cost of the loan (for a base loan of $100,000, the upfront payment would be $1,750). Borrowers can also choose to have the UFMIP “financed” into the loan, and the fee will be rolled into the monthly payment for the duration of the loan.
The UFMIP was not altered during the HUD’s latest set of fee changes.
The chart shown describes the MIP structure, which varies based on base loan amount and loan-to-value (LTV).
The chart differentiates loans in three ways: 1) duration of loan (more or less than 15 years), 2) loan amount (more ore less than $625,000), and 3) loan-to-value (LTV: size of the loan against the value of the home).
The column on the far right determines how much you will pay. The term “bps” refers to “basis points.” One “basis point” is equal to 0.01%.
To take the second row as an example:
You have a loan amount less than $625,000 and an LTV more than 95%. Your annual MIP payment will be 1.35% of the loan amount. On a loan of $100,000 for a house worth $100,000, you would pay $1,350 per year in mortgage insurance fees, or $108.3 per month. In this example, the borrower pays an extra $100 per year in mortgage insurance.
Most FHA loans will require a 1.3% or a 1.35% MIP.
The length of time that the borrower must pay the MIP varies. Before these changes, borrowers could cancel the MIP after reaching a certain LTV or a threshold of five years. Now, the FHA loan requires MIP to be paid for either 11 years or the duration of the loan term.
Using the last row as an example, for a loan term over 15 years and an LTV over 90%, the borrower must pay a MIP the entire duration of the loan term. In the past, this could be canceled at an LTV of 78%, five years into the payment schedule.
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