Monthly FHA Loan Costs are Dropping!
Big changes are coming to the FHA loan this month. The US Department of Housing & Urban Development (aka HUD), announced this last week that the monthly mortgage insurance premiums on new FHA loans endorsed on and after March 20th will be reduced! This will be the first time since 2015 that there has been a change to these costs. The hope is that these changes will benefit borrowers in helping to offset some of the higher interest rates we are experiencing.
But wait, what is an FHA loan and what are Mortgage Insurance Premiums in the first place?
The FHA loan is a mortgage loan geared to assist borrowers that may not qualify for a conventional mortgage loan. The FHA loan is a government backed loan. It allows a borrower to qualify with lower credit scores, higher debt to income ratios , and/or lower down payment amounts versus a traditional conventional loan. The required minimum down payment is only 3.5% of the purchase price. In offset of not putting 20% down and using the FHA loan, borrowers pay a mortgage insurance premium to the Department HUD. The Mortgage Insurance Premium, also known as MIP, is paid in two parts. Part one is an upfront fee paid at the time of closing (and can be financed inside the loan). Part two is broken down into payments spread over the term of the loan. This premium protects the lender in the event the borrower defaults on the loan payments.
30 Basis Point Drop – What is a Basis Point?
The rise in rates this last year has made homeownership less affordable. In an effort to assist with affordability, HUD is decreasing the monthly mortgage insurance premium payments by 30 basis points. What is a basis point you may ask? A basis point is defined as one-hundredth of a percentage point. In talking about a loan, I find it easier to describe it as a percentage of a borrowers loan balance.
To provide an example: 30 basis points is equal to .30% of a borrowers loan. Using a loan amount of $400,000, the percentage of 30 basis points is 400,000 x .30% = 1200. Meaning the borrower will pay approximately $1200 less a year ($100/month) with the new drop in costs.
How has higher rates made it harder on Buyers?
One factor lenders use when qualifying a borrower for a loan, is debt to income. Debt to income is the amount a borrower owes, compared to the income they earn. Lenders look at this debt in a monthly figure. They then add this to how much a borrower would owe with a new monthly mortgage payment. The total monthly debt (inclusive of the added mortgage payment), is then compared to the borrowers monthly income. These calculations help to determine how much a borrower qualifies to pay each month on a mortgage. This then calculates to a loan amount. With rates having climbed this past year, the purchase power of borrowers has decreased. Higher interest rates equal higher monthly payments, which means buyers qualify for lower loan amounts.
For example: A loan amount of $400,000 with a 3.5% interest rate in January of 2022 had a principal and interest payment amount of $1797. That same loan of $400,000 with todays rates hovering around 6.5%, is now $2528. An increase of $731 a month for the same loan amount. With todays rates, that same principal and interest payment from Jan 2022 of $1797 would be a payment for a loan amount of about $285,000. A much smaller loan than before, making homeownership harder to reach with the additional rise in home prices.
How will the drop in FHA loan costs help Buyers?
Currently for most borrowers using an FHA loan, the mortgage insurance premium is based on 85 basis points. By dropping costs 30 basis points, most borrowers will only need to pay mortgage insurance calculated at 55 basis points.
Going back to our example of $400,000… a borrower that has received an FHA loan recently, is paying about $283.33 a month in MIP. (400,000 x .85% = 3400 a year … 3400/12 months = 283.33/month). Beginning March 20th, a borrower getting the same loan amount of $400,000 will only pay $183.33 a month in MIP. (400,000 x .55% = 2200 a year … 2200/12 months = 183.33/month)
This is a savings in cost of $100 a month. This drop in cost may help borrowers qualify for a bit higher loan amount. It is the governments hope that this will help to make homeownership more affordable for more buyers.
Curious Where You Stand?
If you are curious as to how much you would qualify for to purchase a home. Maybe you are curious how much a monthly payment is on a certain price point? Reach out to me. I can help you determine what payments look like. I can also connect you with a lender to find out what amount you may qualify to purchase.