Justin Perry's Mortgage Blog

While many of us were spending Valentine's day with loved ones,  FHA was busy at work notifying lenders that as of April 18th, 2011 they will be increasing their annual mortgage insurance premiums.    This will apply to mortgages with FHA case numbers assigned after that date.   A case number is typically assigned once a loan application is started.   So for you homebuyers out there,  this means you would need to have an application in with your lender before April 18th to avoid the fee increase.

So,  just how much is this increase to FHA mortgage insurance?   Before we discuss how much it will be,  it is important to make sure you understand how much it is.  Currently the annual mortgage insurance premium for a 30 year fixed rate FHA loan with the minimum 3.5% down is 90 basis points/year.   For example on a $250,000 loan the annual premium is $2,250 ($250,000 x .009).   To get the monthly payment just divide that number by 12 and you get $187/month.

After April 18th of this year the annual premium will be raised to 115 basis points (on 30 year fixed rate FHA loans with 3.5% down).   Let's use the same scenario as above to illustrate the difference.   On a $250,000 loan the annual premium will now be $2,875 ($250,000 x .0115).   The monthly breakdown of that comes out to $239. 

That is a difference of $52/month!

FHA is hoping that borrowers and lenders alike will take this increase with a spoon full of sugar.... it helps their medicine go down.   But it hasn't even been a full year since FHA nearly doubled their annual mortgage insurance premiums from 55 basis points up to the now 90 basis points borrowers must pay to obtain an FHA loan.    Their justification for the most recent hike is to bolster their already diminished capital reserves.   The Federal Housing Administration is required to keep a "rainy day fund" equal to 2% of their outstanding loan portfolio.    Over the past few years all the bad loans that were written have taken their levels down to about .5%.   So FHA anticipates that these new fee increases will help them get back on track.

I'm not sure if you noticed but it seems that as an industry we continue to get these fee increases that are said to be "ONLY another $50/month."   It is going to be interesting to see what impact this has on would-be homebuyers.   Here's is an example that you most likely won't see in most news publications.   Someone who was pre-qualified to borrow a maximum of $250,000 will now only qualify for a loan amount of $240,000.   After the new fees go into place the payments on the two loan sizes (rates being equal) will be roughly the same.