The Federal Housing Administration (FHA), which falls under the Department of Housing and Urban Development (HUD), has announced a 30 basis point reduction to the annual mortgage insurance premiums (annual MIP) that homebuyers who obtain an FHA-insured mortgage are charged. The reduction will be from 0.85 percent to 0.55 percent for most homebuyers seeking an FHA-insured mortgage, which, according to HUD, can potentially save American families an estimated $678 million by the end of 2023. This will benefit an estimated 850,000 borrowers, who will save an average of $800 annually.
Expanding Access to Homeownership
According to HUD Secretary Marcia L. Fudge, “For this country to truly succeed, all Americans must have access to opportunity. That means expanding access to wealth-building and home ownership.” She goes on to say, “Today, we are building on the steps we’ve taken to make homeownership more affordable, and HUD is acting to ensure people feel comfortable purchasing a home as they build toward their future. As we reduce housing costs for people with FHA mortgages, we continue our work to address longstanding disparities in homeownership.”
This action is one of several steps HUD has taken to expand homeownership in America. Other steps HUD has taken include changing FHA’s underwriting policies to allow lenders to use positive rental history in evaluating applicants’ creditworthiness, expanding access to housing counseling, and changing the way in which student loan debt is evaluated in FHA mortgage underwriting.
The Impact
Nearly all Single Family Title II forward mortgages insured by the FHA will experience a reduction, encompassing single family residences, condominiums, and manufactured homes, with eligibility extending to all loan-to-value ratios and base loan amounts. The average borrower securing a $265,000 mortgage for a one-unit single family home through FHA can expect to save roughly $800 this year as a result of this reduction. Additionally, decreased MIP can help more people qualify for a mortgage.
What is MIP?
FHA’s Annual MIP, an acronym for Mortgage Insurance Premium, is designed to protect lenders from mortgage defaults. The revenue collected from MIP is used to offset claims made to lenders. One of the goals of MIP is to allow FHA, in the secondary mortgage market, to provide access to mortgage financing.
MIP is calculated as a percentage of the remaining loan balance. For example, a loan balance of $200,000 with a 50 basis point (0.5%) annual MIP, would yield $1000 annually. This is usually divided into 12 equal payments as part of the monthly mortgage payment.