FHA issued a notice yesterday that it will, as expected, make some fairly substantial changes to the mortgage insurance premiums that it charges to FHA borrowers.

As you know, FHA lending has become the lifeline for both the lending industry and the real estate industry. Without it, the activity that we have seen over the last 2 years would have been substantially reduced. With that increase in deal flow, FHA has taken on additional financial risk and exposure, and these new changes are an effort by FHA to reduce that excess risk.

FHA loans normally require two types of mortgage insurance for each loan: an “Up Front Mortgage Insurance Premium” (UFMIP) that is charged at the time the loan is taken out, as well as a monthly Mortgage Insurance Premium (MIP) that is added to the monthly mortgage payments. The UFMIP has historically been a fairly large fee, but one that the borrower could roll into their loan so that they would not have to increase their out-of-pocket expenses, with very little effect on their monthly payment; the MIP, on the other hand, was smaller in absolute terms but had more of an impact on the borrower’s monthly payments.

You may recall that on April 1, 2010, the UFMIP was raised from 1.75% of the borrowed amount to 2.25% of the borrowed amount. FHA’s new requirement will actually reduce the UFMIP to even less than it was previously–down to 1.00% of the borrower amount for most loans; that reduction will for most FHA borrowers reduce their monthly payment by about $6/mo for every $100,000 of their loan (assuming the most common current interest rates, of roughly 4.000%-4.500% for a typical FHA borrower).

However, FHA is at the same time imposing a significant increase in the monthly MIP, from an “MI factor” of 55 on most FHA loans to an MI factor of 90. The MI factor is a way of measuring the size of a monthly MIP; with each MI factor increase of 1 corresponding to an increase in the borrower’s monthly payment of roughly $0.83 per $100,000 of the loan. (Unlike w/ UFMIP, the MIP’s effect on monthly payment is independent of interest rates.) With the MIP nearly doubling because of this increase, the change to a borrower’s monthly payment because of the MIP increase will be about $29/mo per $100,000 of the loan.

The net result of these two changes is that borrowers will see their monthly payments go up by roughly $23/mo for every $100,000 of money borrowed; for a typical DC-area buyer taking out a $400k loan, that would result in an increase in monthly payments of nearly $100/mo. That’s not the end of the world, especially given current historically low interest rates, but it could still reduce the ability of some borrowers to qualify for loans and/or afford the properties that they intend to purchase.

These new changes should go into effect starting with all FHA loans w/ casefile numbers issued on or after September 7th, 2010. Casefile numbers are issued to a specific borrower for a specific property, but do not require having a ratified purchase contract. If you’re thinking of purchasing a specific property or refinancing an existing property using FHA financing but think that you may not be ready to act until after 9/7/10, you may want to talk to your lender to see if they can issue you a casefile number now so you can avoid paying the new UFMIP/MIP fees when they go into effect in September.

UPDATE: FHA has postponed implementation of these changes, so they will only go into effect for casefile numbers issued on or after October 4th, 2010.

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3. Buyer-Paid Private Mortgage Insurance (PMI) now deductible.
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6. Estimating Monthly Payments (the old version)
7. FHA announces plans to make FHA loans much less appealing
8. Mortgage Scenario Snapshot 12/5/09
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