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FHA announced on August 5, 2010 that with the passage by Congress of H.R. 5981, a decrease to FHA’s upfront mortgage insurance premium and an increase to the annual mortgage insurance premium will be effective on September 7, 2010.  ***Update** FHA issued a statement on August 10, 2010, changing the implementation date to October 4, 2010***

Decrease to the Upfront Mortgage Insurance Premium

At least the news isn’t all bad. Currently, the UpFront Mortgage Insurance Premium for FHA is 2.25% of the base loan amount.  According to David Stevens, the Assistant Secretary for Housing/Federal Housing Commissioner, the premium will drop to 1%. This is a significant drop. For example, 2.25% of a base FHA loan amount of $300,000 is $6,750. 1% will be only $3,000, resulting in a savings of $3,750.  Also, an important thing to consider is that there will be a slight payment savings on the principal and interest because of the lower overall loan amount associated with the new lower Upfront Mortgage Insurance Premium. As an example, on a $300,000 loan amount there would be an approximate $20 payment savings, depending on current rates.

Increase to the Annual Mortgage Insurance Premium

Currently, FHA borrowers pay monthly mortgage insurance equal to .55% of the loan if they have less than a 5% down payment. With a 5% or more down payment, and on loan amortized over 15 years, the monthly rate is .5%. On a $300,000 loan at 96.5% loan to value, the FHA borrowers monthly MI is $137.50 per month. Effective for FHA Case numbers pulled on September 7, 2010, the monthly MI on a $300,000 loan will be $225 per month, or an $88 increase.

Staying with our $300,000 loan amount example, the net payment effect will be approximately a $70 increase, or similar to a .4% interest rate increase.

Will This Effect High Cost Areas Such as Orange County, CA ?

The effect for Orange County home buyers using FHA financing should be minimal. From a “qualifying dollars” standpoint, this could change the maximum amount qualified for by approximately $10,000 to $15,000. But most Orange County first time buyers are buying homes based on their payment comfort levels and are not buying the most expensive home they can “qualify” for. Many home buyers will like the new lower Upfront Mortgage Insurance Premium, which will make it easier to possibly refinance in the future into a Conventional loan and drop mortgage insurance should property values increase.

The Effect on the FHA Streamline Refinance Program

This will effect current FHA borrowers wanting to take advantage of the FHA Streamline refinance program. It will be tough to achieve the minimum percentage payment drop required by FHA because of the monthly mortgage insurance increase. FHA borrowers who have been on the fence thinking about doing a FHA Streamline Refinance should talk to an FHA lender before September 7, 2010 just to weigh their options.  ***Now to be impleented on October 4, 2010***