FHA rules are changing on October 4th, 2010. This change is regarding the upfront collection of Mortgage Insurance Premiums (MIP) and the monthly rate amount. To illustrate how these changes will affect buyers, I will use a scenario of a $100,000 30-year home loan and the minimum of 3.5% down, no other factors included.
The first change is a reduction in the up-front MIP that can be financed into the loan. This reduction will result in a drop of 2.25% to 1%. Let’s take a look at how this change will affect your up-front MIP. The current FHA calculation for MIP is to multiply the loan amount by the percentage of the up-front MIP (2.25%).
100,000 Sales Price – 3,500 Down Payment = 96,500 Loan Amount
96,500 x .0225 = $2,171.25
The up-front MIP with the current FHA rules is $2,171.25. After October 4th, 2010, the FHA calculation will change the percentage of 2.25% to 1%.
96,500 x .01 = $965
The up-front MIP with the new rules is $965. This first change results in an up-front savings of $1,206.25. Looks great doesn’t it? However, we have not taken a look at monthly premium that you will pay which gets us to the second change. The second change increases the monthly insurance to .09% from .50% of the current loan.
96,500 x .0055 / 12 = $44.22 monthly MIP under current FHA rules
96,500 x .009 / 12 = $72.38 monthly MIP under new FHA rules
This results in an increase of $28.16 per month even after the up-front reduction from the first change.
Mortgage insurance must be carried until the loan-to-value (LTV) reaches 78%. This means monthly MIP payments for about 10 years on average.
$44.22 x 120 months = $5,306.40 under current FHA rules
$72.38 x 120 months = $8,685.60 under new FHA rules
This second change results in $3,379.20 of extra costs to the buyer.
So how do these rule changes affect the buyer? The affect is a decrease in the amount of buying power. Because the new rules result in a higher monthly payment, the amount the buyer can qualify to borrow will drop.