No More Canceling FHA Loan Insurance

Borrowers who take out FHA home loans will soon be stuck with paying for mortgage insurance for the life of the loan, rather than being able to eventually cancel it as they can now.

The Department of Housing and Urban Development (HUD), parent agency of the FHA, has indicated that it plans to reverse a current policy that allows FHA borrowers to cancel annual mortgage insurance once their unpaid loan balance drops to 78 percent of the home’s “original” value.

No date has been set for making the change, although HUD has indicated it will take place sometime in 2013.

Will only affect new FHA loans

The new policy will only apply to new FHA mortgages taken out after the change is put into effect. Homeowners who currently have an FHA mortgage or who obtain one prior to the change will still be able to cancel their mortgage insurance according to the current rules.

The change will be a costly one. FHA borrowers currently pay an annual mortgage insurance premium of 1.20-1.25 percent on 30-year fixed-rate mortgages; borrowers with jumbo mortgages pay up to 1.50 percent, while those with 15-year fixed-rate loans pay between 0.25-.50 percent.

Intended to restore capital reserves

HUD is making the change after a study by an independent actuary found that the capital reserve of the FHA’s mortgage insurance fund had fallen into deficit, with a ratio of -1.44 percent, representing a negative value of $16.3 billion. The losses are attributed to ongoing impacts from mortgages originated prior to 2009.

“While the loans made during this Administration remain the strongest in the agency’s history, we take the findings of the independent actuary very seriously,” said Carol Galante, FHA acting commissioner. “We will continue to take aggressive steps to protect FHA’s financial health while ensuring that FHA continues to perform its historic role of providing access to homeownership for underserved communities and supporting the housing market during tough economic times.”

An official HUD statement announcing the change notes that FHA currently insures mortgages for the life of the loan, but borrowers are only required to pay insurance premiums for part of that time.

Annual premium to increase as well

In addition to making mortgage insurance a permanent feature of FHA home loans, HUD announced that it also intends to raise the cost of annual mortgage insurance premiums by 10 basis points, or an additional 0.1 percent, across the board. That means borrowers with a standard 30-year FHA mortgage would be paying annual insurance premiums of 1.30-1.35 percent.

The rule change creates some urgency for homeowners who are thinking of buying a home with an FHA mortgage or doing a streamlined refinance of a current FHA home loan, so they can finalize the mortgage before the new rules take effect.

Homeowners with FHA mortgages would still be able to get rid of mortgage insurance once their home equity exceeds 20 percent of their property value by refinancing into a non-FHA mortgage with no mortgage insurance.

Other mortgage types not affected

The HUD rule change does not affect traditional mortgages with private mortgage insurance, which borrowers will still be able to get removed once their mortgage balance drops below 80 percent of their home’s value.

For borrowers who make the minimum 3.5 percent down payment, it takes about 10 years to reach the 78 percent mark on a 30-year fixed-rate mortgage, but only four years on a 15-year loan. The home’s original value is either the purchase or assessed price at the time the loan was originated, whichever is lower.

To be able to have their FHA mortgage insurance canceled under the current rules, they must reach the 78 percent figure through the normal amortization schedule; that is, they cannot speed up the process by making larger payments.

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