BUYER BEWARE: On FHA Loans, Mortgage Insurance To Be PERMANENT

Changes are on the way as the Federal Housing Administration begins implementing new lending policies on April 1. These changes will significantly raise the cost of purchasing a home for anyone borrowing from an FHA-backed lender.

Effective next month, Mortgage Insurance Premiums (MIP) will increase and raise the cost of borrowing for purchasers short on funds for their down payment. MIP rates will increase by about 10 basis points (.10 percent) on most mortgages.  Two months later, on June 3, HUD will increase the minimum time a borrower must pay for mortgage insurance. The biggest surprise to the uninformed will be the change in rules making it impossible for most borrowers to cancel the MIP without refinancing into another loan not administered by the FHA. In other words, the MIP on an FHA loan will be PERMANENT for many.

Under current guidelines, buyers could request that the MIP be eliminated when the loan-to-value (LTV) dropped to 78 percent of the original loan and the annual MIP had been paid for at least 60 months. Most FHA borrowers will find it more difficult to eliminate paying for the insurance in the future. The new changes vary depending on the original terms of the loan. Anyone borrowing greater than 90 percent LTV will be stuck paying MIP for the life of the loan. The only way to eliminate this expense would be to pay off the loan or refinance. Borrowers with an initial LTV between 78 percent and 90 percent may eventually qualify to eliminate MIP, but only after a minimum of 11 years.

FHA backed loans are popular for several of reasons. FHA allows for a 3.5 percent down payment, refinances without appraisal, and its rates are usually low.

In order to avoid the MIP rate increases, home buyers should plan to apply with a lender no later than March 25. Borrowers hoping to avoid the new terms on canceling the insurance should apply by May 24.

Don’t wait before it’s too late to take advantage of today’s low rates.

Sorting through the maze of mortgage options is just another reason to seek professional advice from a qualified and experienced mortgage lender. Depending on your financial situation, there may be other loan products that meet your needs and cost less when everything is taken into account. The lowest mortgage interest rate does not always equal the best deal when all costs are considered.

For more information or to get started with your home search, call Michica Guillory, Broker, at (832) 768-1711.