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Mortgage Insurance Premiums on FHA Loans to No Longer Be Dropped.

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In 2000, Andrew Cuomo, the then serving Secretary of Housing and Urban Development, announced that Borrowers with FHA loans would be able to cancel their mortgage insurance “just like conventional markets” once reaching a 22% equity (a 78% loan to value at the time of the origination ratio). Prior to 2000, mortgage insurance on FHA loans was paid during the entire term of the loan. Unfortunately, on June 3, 2013, most FHA loans will once again require that mortgage insurance be paid for the life of the loan. The automatic cancellation of the mortgage insurance premium will be rescinded and any mortgage with a loan to value ratio of greater that 90% at the time of the origination (a HUGE MAJORITY of FHA loans), will now require that the mortgage insurance be paid for the life of the loan. FHA loans with a loan to value ratio of 90% or less (10% equity or more) will require the payment of mortgage insurance for 11 years, irrespective of the equity the homeowner builds through prepayments to principal. These new rules apply to all applications received on April 1, 2013; therefore, a Buyer seeking an FHA loan must have his or her application in place on March 31, 2013, in order to avoid the new rules.

These new rules apply only to FHA mortgage insurance and not to private mortgage insurance required on conventional loans. Borrowers with conventional loans may still request that the private mortgage insurance be cancelled once the Borrower reaches an equity of 22% (or a 78% loan to value ratio at the time of loan origination). The Borrower must have paid the mortgage insurance for 24 months.

For those who are unfamiliar with mortgage insurance, mortgage insurance is an insurance product designed to protect the lender from loss in the event of a default. Borrowers with less money invested as equity present a higher risk of default than Borrowers with a larger equity. If a Borrower defaults on the loan, which happens much more frequently with Borrowers with little money invested in the property, requiring foreclosure, and the house is eventually not sold for enough money to repay the lender, the loss is covered by mortgage insurance. Conventional lenders require Private Mortgage Insurance (PMI) on all loans where the Borrower is borrowing more than 80% of the purchase price of the home (The Buyer/Borrower has less than a 20% equity). On the other hand, mortgage insurance is required on all FHA loans, irrespective of the equity. However, under the new rules, the number of months during which the mortgage insurance payments must be paid is now dependent on the equity at the time of the purchase. The new rules also allow FHA to closely scrutinize credit scores, debt ratios, and HUD now requires that underwriters “manually” review any credit score of less than 620. Therefore, even if the automated underwriting system approves an application, an underwriter could reverse the approval. Further, if a Borrower has a debt to income ratio greater than 43% (his or her debt is greater than 43% of income), a manual underwrite MUST be obtained, even if the automated underwriting system approves the application.

It is yet to be seen how these new rules will affect the mortgage industry and real estate sales.

From our offices in Decatur, Alabama, we represent clients in Morgan, Madison, Cullman, Lawrence, and Limestone Counties, including the communities of Decatur, Huntsville, Madison, Hartselle, Cullman, and Athens.

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