FHA mortgages are hot and there’s a good chance they may soon become hotter.
The FHA is a mortgage insurance program that got a huge boost last year when in January the government announced a big rate cut: The annual mortgage insurance premium was reduced from 1.35 percent to .85 percent. That’s a half percent reduction, the equivalent of a lower mortgage rate, and for someone with a $175,000 balance a savings of about $875 in the first year of the loan term.
To say that the FHA rate cut was greeted with public enthusiasm is an understatement. Among other results, the FHA endorsed an additional 325,000 mortgages; its reserves increased to more than 2 percent of the loans it insures, thus meeting a congressional requirement; and to compete, several major players in the lending field started to offer financing with just 3 percent down, less than the 3.5 percent required for an FHA loan.
A look at the latest production figures show that the FHA is having another banner year. As of April, 675,792 mortgages have been endorsed so far this fiscal year versus 505,142 loans for the same period last year.
What accounts for the rising fortunes of the FHA program? Could it get better?
The FHA program began in the 1930s and has insured more than 40 million loans since then. With FHA insurance, borrowers can purchase homes with just 3.5 percent down, plus it allows liberal qualification standards.
Because it’s an insurance plan, FHA borrowers must pay insurance premiums: First, an upfront mortgage insurance premium (the upfront MIP) equal to 1.75 percent of the loan amount, a sum which can be added to the debt to reduce cash needs at closing. Second, an annual mortgage insurance premium (the annual MIP) now equal to .85 percent of the loan balance. Under current FHA rules, the annual MIP continues for the life of the loan for borrowers who purchase with less than 10 percent down.
Lower FHA Mortgage Rates
Given the great success that the FHA mortgage program has enjoyed with the 2015 rate cut, and given that FHA reserves are stronger than even Congress demands, has the time come for another rate reduction?
The Community Home Lenders Association says the annual MIP should be knocked down to .55 percent, the rate in place before the mortgage meltdown. Also, they want the annual MIP to end once the loan reaches 78 percent of the original principal balance.
A lower annual rate reduces monthly borrower costs and that means mortgage applicants would be more likely to qualify for financing. With more borrowers able to get loans, the pool of potential buyers would increase and that would be very good for real estate sales, home prices, and the economy in general.