FHA Wants You to Make you Pay Mortgage Insurance for Life.  What Can You Do about It?

FHA mortgages, backed by the Federal Housing Administration, are an excellent loan product for many Americans who have lower incomes and/or credit scores. But the FHA mortgage comes with one major downside: mortgage insurance.

FHA mortgage insurance or MIP is a special type of insurance policy that protects your lender if you default on your mortgage. This insurance allows the lender to issue credit to people with lower credit scores, higher debt to income ratios and lower incomes. FHA MIP reduces the risk for the lender, and you enjoy the benefits, which is namely having a mortgage with a low interest rate and down payment.

FHA MIP is paid for up front and each month. You need to pay an upfront premium of 1.75% of the loan amount, which is normally wrapped into the loan. In addition, you pay an annual premium that is part of your monthly mortgage payments. Depending upon the size and term of the loan, the expense is .45% to 1.05% of the amount of the loan.

The major downside with MIP is for most current loan holders with loans issued after June 2013, you must pay the insurance for the life of the loan. The only exception here is if you put down 10% or more on the loan. In this case, you can cancel the insurance after 11 years.

If you have an FHA loan and you want to get out of mortgage insurance, you really have only one major option, assuming you put down less than 10%: You need to refinance when you can out of the FHA loan into a conventional loan. When you have at least 20% equity in the home, that is when you should think about getting out of the FHA mortgage and going to a conventional loan.

Once you have 20% equity, you can usually get out of paying mortgage insurance on a conventional mortgage. You will need to show a solid payment history when you want to refinance, however. Many people are enjoying impressive gains in home values in 2018, with the average home value increase more than 6% across the US, and much higher in many markets. In San Antonio TX, for example, homes have increased 10% in value in the past year alone. This could provide a way for some people to refinance into a conventional loan with at least 20% equity.

But what if you got an FHA mortgage when rates were lower and now want to refinance when rates are higher? These days, rates are around 4.5% and even higher in some cases. In this situation, you may need to delay a refinance until rates have lowered.

If you think you cannot refinance right now, you may have another hope though. The commissioner for FHA has wide latitude to alter the premium structure on FHA loans and has done so several times in the past decade. It could be that the policy will change in the future so that you can cancel MIP sooner.

More About FHA Loans

Many Americans rely on FHA loans to buy their home because the terms for getting these loans are so good. FHA loans can be obtained with just a 580-fico score and a 3.5% down payment for many borrowers. This is one of the lowest down payment and most flexible mortgage programs in the country. Millions of Americans have been able to get a home loan much sooner by taking advantage of the FHA program.

Of course, the MIP requirement is a major annoyance for many borrowers. It seems hard to believe that you should have to pay $100 or $200 per month for mortgage insurance, especially for the entire life of the loan! But home owners should remember that getting an FHA loan probably allowed you to stop renting much sooner than if you had waited to qualify for a conventional loan.

The bottom line with FHA loans and MIP is that mortgage insurance is expensive, but it provides a way for people with lower credit scores and mediocre income to get a home loan much faster than they otherwise would. After you get an FHA loan and are approaching 20% equity, try to get your credit higher so you can refinance into a conventional loan. This is the best way to go for people who want to reduce their loan costs going forward.

fha pmi

FHA Homeowners Need to Do This, to Get Rid of PMI

FHA mortgage insurance, known as MIP, is an insurance policy that protects the lender if the loan holder defaults on the mortgage. The MIP policy allows the lender to issue FHA backed loans that require a smaller down payment. FHA MIP lowers the risk for the lender, and the benefits are given to the borrower.

The home-buyer pays for MIP both up front and every month. Borrowers with loans that were issued after June 1, 2013 must pay mortgage insurance for the entire life of the loan, with a few exceptions. If you put down 10% or more on the loan, you can cancel the MIP after 11 years. If your loan was closed before June 1, 2013, you can cancel the MIP once you have 20% equity in the home.

Are You Looking to Get Rid of Paying Mortgage Insurance on Your FHA Loan?

Another option to get out of paying mortgage insurance if you have a loan issued after June 1, 2013 is to simply refinance the loan into a conventional mortgage when you have reached 20% or more equity in the home. Note that getting approved for a conventional loan requires a higher credit score than with an FHA loan. So, make sure your credit is in good shape if you want to refinance into a conventional loan. There is no prepayment penalty on an FHA loan program, so you can refinance at any time.

Refinancing into a conventional loan could occur sooner than you think; property values have gone up markedly in the past three years. You may want to check property values in your area and even pay for an appraisal to see how much your home could sell for. There are some parts of the country that are seeing yearly property value increases of 10% or more. According to the National Association of Realtors, the median home listed for sale in Q2 of 2017 was $255,000. This was more than 6% above a year earlier. This is happening across the country.

But one issue you could run into is the interest rates for a refinance into a conventional loan could be higher than what you are paying now. Rates in 2018 are on the rise, with conventional rates in the 4.5% and 4.6% range. This is nearly a point higher than a year ago. If your rate is at 4% or lower, you might need to wait to refinance to get rid of your mortgage insurance payment.

Cancelling Mortgage Insurance with a Conventional Mortgage

You have more options to get rid of PMI with a conventional mortgage. PMI is the name of mortgage insurance for conventional loans. Once you reach 20% equity in the home with a conventional mortgage, your PMI should be dropped off the loan. You should write a letter to your lender to request the insurance policy be cancelled. Not every lender will automatically cancel the mortgage insurance, you may need to contact them in writing. But federal law states the conventional lender must drop your PMI once you have 22% equity. Still, it is the smart home owner who keeps on top of this matter; it is not unusual for a lender to continue to accept PMI payments beyond the point which you are required to pay them.

But keep in mind that most lenders will base the 22% equity/78% LTV on the last appraised value. If your property has shot up in value, you should contact your loan servicer to determine what the requirements are to get an early cancellation. The loan servicer usually will require a new appraisal. This will cost you approximately $400, so you should check home values in your area to see if your home will really appraise enough to cancel PMI early. You can check with your realtor who should be happy to run comps for you for your neighborhood. This is one of the main reasons that LPMI loans are in high demand in 2018.

The bottom line is that mortgage insurance is often a necessary evil for many home buyers. If you do not have the cash to make a 20% down payment, you will need to get mortgage insurance, unless you get a VA loan.

Many home buyers with previous credit problems may need to get FHA financing because these loans are easier to get with lower credit scores. Even though you could get locked into paying MIP longer than you like, sometimes for the life of the loan, this may be the best option for people with lower credit scores. But once you have 20% equity and you have good enough credit to refinance, you should get into a conventional mortgage if the rates are low enough to make the move make sense.

 

 

References:  https://smartasset.com/mortgage/mortgage-insurance

FHA Homeowners Who Purchased a House after June 1, 2013.   Here is the Bad News.

Many home buyers with past credit problems and lower down payments turn to the Federal Housing Administration or FHA to help them get a mortgage. FHA mortgages are not issued by FHA; they are underwritten by FHA approved lenders who have more credit and income flexibility in their underwriting standards so people who may not otherwise be able to get a home loan can get one. It is possible for a borrower with a 600-credit score and a 3.5% down payment to be approved for an FHA mortgage in some situations. And the borrower can often get that loan at a rate below conventional rates. What a deal!

But as with almost everything in life, nothing is for free. With FHA mortgages, you must pay for mortgage insurance at closing and annually. This is referred to as MIP. FHA assesses a 1.75% upfront mortgage premium when the loan closes. Then, it charges the buyer a varying rate each year; most common it is 1.35% of the loan value. The borrower pays that premium each month as part of their mortgage payment.

FHA loan holders are not the only ones who must pay mortgage insurance. On conventional mortgages that are supported by Fannie Mae and Freddie Mac, you must pay PMI or mortgage insurance when you have less than a 20% down payment. Once you have reached 20% equity through mortgage payments, appreciation or a combination, you can have PMI removed.

June 1, 2013

It used to be that you could do the same thing with FHA loans. In 2013, it was determined that the FHA’s Mutual Mortgage Insurance Fund or MMI was short of money. This fund is used to pay default claims when buyers cannot pay their loans anymore. Federal law dictates there must be a minimum amount of funds in MMI – $2 for every $100 that is insured by FHA. As of an audit in 2013, FHA had -$1.44 for every dollar it insured.

That is why FHA had to change its rules. In the past, FHA required homeowners to pay MIP as long as their loan to value was more than 78%, where the value assumed was whatever the last known value was, such as at loan closing. Also, if the loan term was more than 15 years, at least 60 payments had to be made before FHA could cancel MIP.

But as of June 1, 2013, this changed. All loans closed on that date and afterwards that had a down payment of 10% or more could only have MIP cancelled after 11 years. Loans that have less than a 10% down payment must pay MIP for the entire term.

This means if you buy a home with an FHA loan with 3.5% down, you must pay for MIP for all 15 or 30 years of the loan term. This may seem very unfair, especially for people who have far more than 20% equity in their property after years in the home. But this is the price you pay for getting approved for a loan through FHA.

Of course, FHA rules change often. It is possible this rule could be changed in the future, but as of today, MIP is forever if you put down less than 10%.

Other Options

The silver lining to this unfortunate situation is that if you have a better credit situation and are paying your loan on time, you do not need to keep your FHA loan forever. If the interest rate environment gets to a point where you can refinance at the same or even a lower rate into a conventional loan, you may be able to do so without paying mortgage insurance.

With a conventional loan and at least a 20% down payment, you can get a loan without any mortgage insurance. You will simply need to make sure you have suitable credit to be approved for a conventional loan. Lending standards for conventional loans are stricter than FHA. You will generally need a credit score of 640 to be considered and will have to pay a higher rate at that FICO score. The best conventional rates go to those who have well over a 700 FICO score.

The bottom line with FHA loans is this is a great program for people with average or even poor credit. Some people with past bankruptcies or foreclosures will have difficulty being approved for a conventional loan. FHA is often the last resort, and it really is a good deal. MIP is the only major problem though. Just keep in mind that you need to get your credit score and payment history in order if you ever want to refinance the FHA loan so you do not need to pay mortgage insurance after you achieve 20% equity.

 

 

 

 

FHA Home Purchase and Refinance Applicants Are Penalized with Mortgage Insurance in Perpetuity Because of Reverse Mortgage Losses. Fair?  We think not.

As home buyers decide between an FHA and conventional mortgage, it is important to consider the matter of mortgage insurance. On a conventional mortgage, if you put down less than 20% down payment, you must have mortgage insurance until you have reached 20% equity. At that time, you can request that the insurance be cancelled.

Most FHA finance programs today are different. If your loan was written after June 2013, you usually have permanent mortgage insurance. Even if you have more than 20% equity in the property, you will have to pay for the insurance every month of the loan. The only exception is if you put down 10% or more; in such cases, you may cancel the insurance in year 11.

Is FHA worth paying mortgage insurance every month? That is the question.

Below is more information about FHA mortgage insurance that will help you decide if FHA is right for you.

FHA Mortgage Insurance Overview

Mortgage insurance is a policy that protects the lender and mortgage servicer from losses if you default on the loan. Most loans, as we noted earlier, require a 20% down payment to avoid mortgage insurance. But FHA now requires it for almost all loans.

Mortgage insurance for FHA loans is not cheap. You first must pay an upfront premium of 1.75% of the total loan amount. This premium can be paid at closing, or you can have it rolled into the loan amount. Note if you do the latter, the loan will be more expensive.

That is not all. You also must pay an annual mortgage insurance premium that is added to each loan payment. Depending upon the size and term of the loan, the expense will be from .45% to 1.05% of the amount of the loan.

For instance, if you have a $200,000 loan with $7,000 down or 3.5%, the upfront premium will cost you $3,370. If you pay 1.05% of the loan amount per year, that is $2,026 per year or about $169 per month.

Clearly, FHA mortgage insurance is expensive. So why get financing with a FHA program? FHA financing is much easier to qualify for; if you have a 580-credit score, you can still sometimes get an FHA insured loan with 3.5% down. For many Americans, an FHA program is the only option for them. In that case, it can be a perfectly acceptable financial decision. After all, if you wait until you qualify for a conventional loan with a higher credit score, you will need to pay rent for years longer. Many view renting as a waste of money. It is best, in this way of thinking, to buy as soon as you can, even if it comes with expensive mortgage insurance.

Cancelling FHA Mortgage Insurance

It was once easier to cancel FHA mortgage insurance. But in 2013, the reserve fund for the FHA program became too low, and new rules were passed so that most buyers must pay for mortgage insurance for the life of the loan. If you bought your home after June 2013, you will usually need to pay mortgage insurance for the life of the loan. For those with 10% or more down, you can cancel the insurance after 11 years.

So, is there any way to get rid of mortgage insurance if you put down less than 10%? It is possible that the rules can change again; the FHA commissioner has the authority to alter the regulations so that people can cancel mortgage insurance. If this does not happen, there is one other option: Refinance into a conventional loan once you have 20% or more equity. You will not need to pay mortgage insurance anymore with a conventional loan.

To do so, you need to improve your credit score. You can get FHA financing with a credit score in the high 500’s. But to get a loan approved with a conventional lender, expect to require a credit score of at least 620 and 640 will make it easier. Check the minimum credit scores needed for a FHA loan today.

The important thing to remember with FHA mortgage insurance is that it is an expensive fact of life if you have a lower credit score, and/or have a past financial problem on your credit report, such as a bankruptcy or foreclosure. While it is not an ideal option to pay for mortgage insurance for the life of the loan, it still can be a good decision to make financially. Anything beats paying rent for years and years.

Always reevaluate your situation and see if you can find a competitive mortgage with no PMI required. If you have an FHA insured lien, make it a goal to raise your credit score within a few years and refinance out of the loan into a conventional loan. You just need to determine when you will have 20% equity, so you can avoid mortgage insurance on the conventional loan.