Federal Housing Administration Commissioner announced a series of changes to be issued this week that will affect many borrowers who are using the FHA loans to fund their home purchases. These changes allow the agency to manage risk and strengthen the health of the Mutual Mortgage Insurance Fund.
FHA will increase its annual mortgage insurance premium for most new mortgages by 10 basis points, or 0.10%. Premiums on jumbo mortgages — $625,000 or larger — will also increase by 5 basis points, or 0.5%, to maximum authorized annual mortgage insurance premium. These increases exclude certain streamline refinance transactions. The FHA will also require most borrowers to continue paying annual premiums for the life of their mortgage loan.
In 2001, the FHA cancelled required MIP on loans when the outstanding principal balance reached 78% of the original principal balance. However, FHA will remain responsible for insuring 100% of the outstanding loan balance throughout the entire life of the loan, a term which often extends beyond the cessation of these MIP payments.
This means higher costs for borrowers, in the upfront costs but also in the length os the term of the loan. This can be a serious deterrent for first time home buyers who do not have sufficient funds for down payments or with some credit issues.
According to the FHA administration, the MMI Fund has foregone billions of dollars in premium revenue on mortgages endorsed from 2010 through 2012 because of this automatic cancellation policy. Thus, the FHA will collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled, permitting FHA to retain significant revenue that is currently being forfeited prematurely.
These vital changes to the FHA lending costs are being implemented to protect the MMI fund and encourage the return of private capital to the housing market. The series of changes will also include home equity conversion mortgage consolidation, requiring manual underwriting on loans with decision credit scores below 620 and DTI ratios over 43%, raising down payments on loans above $625,000, access to FHA after foreclosure and continuing efforts to improve risk management.
The FHA will also step up its efforts for approved lenders with regard to aggressive marketing to borrowers with previous foreclosures, while also reminding lenders of their duty to fully underwrite loan applications. All new loans must meet FHA guidelines.
FHA is also set to announce a proposal to increase down payment requirements for mortgages that have original principal balances above $625,000. The minimum down payment requirement for these mortgages will increase from 3.5% to 5%. Although this falls into the parameters defined by the government to minimize risk, it does increase the borrowing costs and lenders will have to come up with innovative programs to make lending possible to future homebuyers who are low on cash reserves for down payment but have the financial capacity to repay.