Reduction in FHA annual premiums in 2015: What does it mean for you?
For many first time-home buyers, who can’t afford to pay a traditional 20 percent down payment and have only a decent credit score, FHA backed loans have been really helpful. The highlight of FHA loans is that it requires a minimum down payment of 3.5%. In fact, it is basically an insurance program where FHA doesn’t lend money to borrowers. It provides lenders insurance protecting them against any potential losses if a borrower defaults on the mortgage loan payment. So, when FHA plays a strong third party role with enough insurance and borrower paying the premiums, it allows the lenders to offer loans with only a little down payment. In addition, these loans make it easier to qualify for a mortgage as they have less stringent qualification requirements than otherwise required with a conventional mortgage program.
In spite of the obvious benefits, too many credit worthy families who can opt for FHA approve loans have stayed on the side-lines of leveraging home ownership opportunities. Reason? People opting for FHA loans are subject to both upfront and annual mortgage insurance premiums and the increasing annual mortgage insurance requirement for FHA has not been particularly helpful. Since 2010, the annual premiums on FHA loans have increased five times.
To this effect, President Obama had announced a major change that his administration took in 2015 – by making mortgages more affordable, thereby allowing more credit worthy families to achieve their dream of owning a house.
So, what’s new with FHA mortgage insurance premiums in 2015?
It was announced that the Federal Housing Administration is “reducing annual FHA mortgage insurance premiums by 0.5 percentage points from 1.35 percent to 0.85 percent”. This reduction in premiums will help typical first-time home buyers to save $900 a year on their mortgage payments. And homeowners who are refinancing their existing loans into an FHA mortgage will see similar reductions to their mortgage payments as well. The lowered premium rates will be effective as of January 26, 2015. So, in a nutshell, if you are a borrower who has a case number assigned on and after January 26, 2015, you will be eligible for reduced annual mortgage insurance premiums.
According to the statement issued by the White House: “Too many creditworthy families who can afford — and want to purchase — a home are shut out of home ownership opportunities due to today’s tight lending market.” and also,
Lowered premiums will create opportunities for 250,000 new homeowners to purchase a home over the next three years. The new home buying activity and benefits of the cost savings to borrowers will help further strengthen the housing market. An increase in first-time home buyers and more affordable mortgages will help spur more residential construction and help create new jobs in the housing sector.
Does that mean FHA-backed loan is the best option for everybody? Not exactly. First thing to understand is whether you are eligible to take advantage of these new lower premiums.
- What if you have already been approved for an FHA-insured mortgage and have been assigned an FHA case number before the date when it had become effective?
- Are you a borrower with FHA-insured reverse mortgages? So, are you eligible for this?
- What if you plan to apply for an FHA-insured mortgage with a 15-year loan term? Would you be eligible?
So, there are a few things to factor in before you decide that the reduction in premiums and lower interest rates will benefit you or not.
1. Reduced annual insurance premiums is effective as of January 26, 2015. Borrowers with case numbers assigned on and after January 26, 2015 will be eligible for reduced annual mortgage insurance premiums.
2. If you have just closed on your mortgage loan, you are not eligible for FHA’s lowered premiums.
3. If you have already been approved for an FHA loan and have been assigned an FHA case number, it is possible to get the existing case number cancelled and have a new one assigned so that you can benefit from new premium rates. However, the new case number must be assigned on or after January 26, 2015. You must consult your lender to get an in-depth understanding of how getting your existing number cancelled will impact things like closing date etc. And worth remembering is that this only applies for borrowers who have not yet closed on your mortgage.
4. The upfront mortgage insurance premium that you need to pay with FHA powered loans is still at 1.75% which is added to your base loan amount. This means this reduction only affects the annual premium and not the upfront premium. In addition, the upfront mortgage insurance premium doesn’t get phased out over the period of the loan life. In traditional mortgage programs, you can request the lender to cancel it under certain conditions. To know when you can ask your lender to cancel your PMI with traditional loans, read here. Knowing this, you might want to re-consider going for FHA approved loans if you want to avoid these back-end costs. Conventional loans have their own benchmarks and qualification parameters regarding credit scores and debt ratio. Read Factors that Can Affect Your Mortgage Application to know more.
5. Are you taking out FHA-insured mortgage for a loan term of 15 years or less? Then you must know that the reduced annual mortgage insurance premium rate will not apply in your case. These reductions only apply to FHA-backed mortgages for a loan term of anything greater than 15 years.
6. The reduction in annual mortgage insurance premiums will be applicable for forward loans only. Premiums for borrowers who have taken FHA-insured Home Equity Conversion Mortgages (HECMs) will not be affected.