FHA no longer will drop mortgage insurance premiums
Andrew Cuomo, then the U.S. Housing and Urban Development Secretary, said it was a big day for the nation’s homebuyers.
The Federal Housing Administration’s (FHA) Mutual Mortgage Insurance Fund (MMIF) had experienced an unprecedented financial turnaround, allowing borrowers who had reached a 22 percent equity stake in their homes an opportunity to drop their mortgage insurance “just like the conventional markets,” Cuomo told a group of reporters.
That announcement, made 13 years ago, was a big deal because FHA mortgage insurance previously had to be paid for the entire term of the loan, regardless of how much equity a borrower had in the property. The move saved a borrower with a $100,000 loan approximately $1,500 over the life of the loan.
As of June 3, however, most FHA loans again will require mortgage insurance for the life of the loan. In a recent letter, HUD informed all lenders offering FHA loans that the automatic cancellation of mortgage insurance premiums will be rescinded and that any mortgage greater than 90 loan-to-value (LTV) at time of origination (the overwhelming majority) would require mortgage insurance for the life of the loan.
If the FHA loan is originated at an amount equal to or less than 90 LTV, the mortgage insurance must remain for 11 years.
FHA also will scrutinize credit scores and debt ratios. As of Apri1 1, HUD now requires a “manual” underwriter review if the credit score is less than 620. This means that even if FHA’s Automated Underwriting System (AUS) approves an application, an underwriter may reverse this approval with a closer review of the data.
In addition, if the total qualifying ratio, often referred to as “debt-to-income” ratio, is greater than 43 percent of the borrower’s income, a manual underwrite must be obtained regardless of AUS findings.
Why? The once healthy MMIF now is struggling to stay afloat. In fact, an audit, conducted by the Integrated Financial Engineering Inc., concluded that FHA had reserves of $30.4 billion but will experience a net loss of $46.7 billion for 2012 on existing loans in its primary account. The agency entered fiscal year 2013 at negative $16.3 billion. By comparison, the FHA MMIF had a negative economic value of $2.6 billion in 1990 before rebounding later in the decade.
“These new rules are intended to ensure that borrowers have sufficient income or assets to repay a mortgage loan,” said Mark Palmer, a mortgage banker.
Mortgage insurance — which the FHA labels mortgage protection insurance — is commonly called private mortgage insurance (PMI) by conventional lenders. Most banks, credit unions, savings and loans and other lending institutions require this coverage for people borrowing more than 80 percent of the purchase price of the home.
Because a lack of a substantial down payment has made some borrowers more of a risk than other conventional buyers, low down-payment buyers must obtain an insurance policy to make sure the lender gets his payments. If the borrower defaults on the loan and the house is not sold for enough money to repay the bank, mortgage insurance will supply the difference.
The cost of mortgage insurance varies depending on the amount borrowed and when the premiums are paid.
Palmer said that borrowers with loans not insured by FHA could still request to have their mortgage insurance payments eliminated when they reached the 22 percent equity threshold.
“However, it’s not automatic,” Palmer said of dropping the payments. “The borrower must request it be removed. And, depending on when they obtained the mortgage insurance, there is a minimum amount of the loan term that needs to be fulfilled. At this time, the minimum is generally 24 months.”
Private mortgage insurance is often confused with mortgage life insurance. PMI is required by lenders, while mortgage life is an option for the buyer.
Typically, a mortgage life policy pays off the home if the buyer dies or is disabled. Often, the goals of mortgage life can be accomplished by purchasing a term life insurance plan. This option can be less expensive and stays with the individual, not the loan.
Mortgage life is still available if you did not accept coverage at the time you took out your loan or refinanced it. Ask the lender who wrote your loan, or the insurance agent who handles your homeowners insurance, for details.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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