*Update: This is currently on hold due to President Trump’s first executive order.
The Federal Housing Administration just announced a reduction in its annual mortgage insurance premium from 0.85 percent to 0.60 percent. While the numbers may seem minuscule, the impact could be huge for homeowners-to-be.
Mortgage loans provided by the FHA are the backbone of lending for young, first-time and low-income homebuyers. Conventional lenders are too often hesitant to lend to first-time buyers unless there is a significant down payment accompanying the deal. And, as we all know, starting out can be tough. Even the most prudent and creditworthy 20-somethings may have a hard time coming up with several thousand dollars at closing. This is where FHA loans come in.
Most of us associate FHA loans with lower down payment requirements – a key piece of the federally insured loans. But, unfortunately, the high cost of mortgage insurance can sometimes price would-be buyers out of the home of their dreams. The new reduction in the FHA’s mortgage insurance premium may work to ameliorate that problem.
When you break down the reduction, it appears to be an economy-driving move. Think about it this way. If mortgage insurance premiums drop, more borrowers can meet the debt-to-income ratio required to purchase a home. So, reducing mortgage insurance premiums today will translate into more eligible, responsible borrowers being able to purchase a home through FHA loans. Creating more borrowers means making more families homeowners.
An increase in the number of borrowers will also mean more money in the Mutual Mortgage Insurance Fund to protect taxpayers. The Fund guards against losses incurred if borrowers run into trouble. For the past four years, the Fund has experienced growth and currently holds enough reserves on hand to meet future claims. The health of the Fund no doubt contributed to this week’s announced reduction.
Estimates on the impact of the reduction indicated the average borrower with a 30-year fixed rate $200,000 mortgage will save about $500 a year. This amount may not seem critical, even for low-income families. But the reduction in the mortgage insurance requirement will make more people eligible for FHA loans. And that means more families will get a chance to catch a piece of the American Dream. Seems like a pretty good deal to me.