HUD released its Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Fund Fiscal Year 2012 back in November of 2012. It’s a 62 page read that will put you to sleep within the first several paragraphs. If you’re interested in purchasing or refinancing in 2013 using FHA financing, though, you should be aware of this looming policy change unveiled within its pages:
Revised Premium Cancellation Policy
Under a policy change made in 2001, FHA has been cancelling required mortgage insurance premiums (MIPs) on loans for which the outstanding principal balance reaches less than 78% of the original principal balance. However, FHA remains responsible for insuring 100% of the unpaid principal balance of a loan for the entire life of the loan, such loan life often extending far beyond the cessation of MIP payments. As written, the timing of MIP cancellation is directly tied to the contract mortgage rate, not to the actual loan LTV. The current policy was put in place at a time when it was assumed that home price values would not decline, but today we know that LTV measured by appraised value in a declining market can mean that actual LTVs are far lower than amortized mortgage LTV, resulting in higher losses for FHA on defaulted loans. Analyses conducted by FHA’s Office of Risk Management projects lost revenue of approximately $10 billion in the 2010-2012 vintages as a result of the current cancellation policy. The same analyses also suggest that 10%-12% of all claims losses will occur after MIP cancellation. Therefore, beginning with new loans endorsed after the policy change becomes effective later in FY 2013, FHA will once again collect premiums on FHA loans for the entire period during which they are insured, permitting FHA to retain significant revenue that is currently being forfeited prematurely.
How might this impact you?
If you currently have an FHA mortgage, don’t sweat it. Your MIP will end once your principal balance reaches 78% LTV (loan to value) and a minimum of 60 mortgage payments have been made. If you’re contemplating refinancing this mortgage, however, you should act now. If your rate is currently in the mid to high 4% range, you are probably a good candidate for an FHA streamline refinance.
If you have been considering purchasing or refinancing with FHA this year, here are a few question to ask yourself:
- Is this my starter home? If so, the new policy won’t significantly affect you. You would have paid the MIP for 60 months regardless. And, depending on your rate, down payment, and term, it will probably take longer than the 60 months to reach 78% LTV. For example, for a 30 year mortgage with 3.5% down, it will take between 9-10 years to reach a LTV of 78%. If you end up staying in the home beyond 10 years in this scenario, waiting to buy after the policy changes will start affecting your bottom line.
- Is this my forever home? If so, and the policy changes before you purchase, the only way to get out of paying the MIP forever is to refinance into a conventional loan at some point. Since we don’t know what rates are going to be in 5-10 years, this could be risky business. If you’re looking for your forever house, it might pay to act now before this new policy takes effect.