In March, some mortgage borrowers will begin saving. The Biden administration has announced a 0.30 percentage point reduction in mortgage insurance premiums for Federal Housing Administration (FHA)-backed mortgages, from 0.85 percent to 0.55 percent.
According to the Biden Administration, the average annual savings of $800 will benefit approximately 850,000 homebuyers and homeowners by 2023. The reduction applies to all FHA loans originated after March 20, 2023.
Bob Broeksmit, president and CEO of Mortgage Bankers Association, said this is a meaningful rate reduction that will improve access to credit for a broad range of borrowers.
“In an era when we are trying to close the homeownership gap between black and Hispanic homeowners and white homeowners, the FHA is needed to close that gap,” Broeksmit said. “And that reduction will help even more.”
But not all FHA borrowers are eligible for discounts.
Who qualifies for the FHA discount?
FHA borrowers pay an annual mortgage insurance premium (MIP), regardless of their down payment amount, to protect lenders who originate FHA loans.
As a result of this policy change, new FHA borrowers with a base loan amount of $726,200 or less will pay 0.55% MIP (less than 0.85%) for the life of the loan or until they refinance into a conventional mortgage. For borrowers with 10% or more down, the MIP will be due after 11 years and the cost will be reduced from 0.80% to 0.50%.
For borrowers with loans over $726,200, the new MIP is 0.75 percent, down from 1.05 percent. For those who make a down payment of 10% or more, the MIP term is 11 years and costs from 1% to .70%.
Borrowers must also pay the Upfront Mortgage Insurance Premium (UFMIP), a one-time fee equal to 1.75% of the loan amount that can be credited to your mortgage. However, this second-lien premium is not affected by the new policy.
Borrowers who already have an FHA loan will not be eligible for this discount. In other words, this reduction is not retroactive.
How much will FHA borrowers save?
The amount borrowers will save through the 30 basis point reduction in MIP will depend on the size of their mortgage. Those who borrow more will end up saving more.
In a statement, the White House touted FHA loan savings on typical homes sold in markets across the U.S.
City Loan Amount MIP Annual Savings
Detroit $200,000 $600
Cincinnati $300,000 $900
Phoenix $400,000 $1,200
Austin, Texas $500,000 $1,500
Source: White House press release
The reduced premiums provide borrowers with greater flexibility. They can use the additional funds from the discounted fees to increase their purchasing power or improve their chances of getting approved for a loan.
“When lenders determine people’s eligibility for a loan, they consider the relationship between a potential homebuyer’s income and the cost of the loan. So if the loan is cheaper, they don’t have to make as much money to qualify,” Broeksmit said.
Further relief for FHA borrowers unclear
Lowering the annual MIP is an important step toward making loans more affordable for first-time and low- and moderate-income homebuyers. However, many industry and advocacy groups are calling for even more savings for FHA borrowers – namely, the elimination of the loan term MIP requirement.
All types of loans – including conventional loans, the most popular financing option – typically require mortgage insurance to protect lenders from default. This insurance is required for conventional loans with a down payment of less than 20 percent. Once 20% equity is reached, the insurance is automatically removed from the conventional loan. In other words, once the loan-to-value ratio reaches 80%, it disappears.
This is not the case with FHA loans. FHA borrowers with at least 10% down pay only 11 years of MIP. however, those with less than 10% down are required to pay MIP over the life of the loan, even though the loan is not considered risky by most lenders’ definitions.
This additional cost can be burdensome for FHA borrowers. Several organizations, including the Mortgage Bankers Association, the National Association for the Advancement of Colored People and the National Housing Conference, have called on the U.S. Department of Housing and Urban Development (HUD) to relax the policy.
“We will continue to advocate with HUD for changes in loan term insurance requirements,” said Broeksmit of the Mortgage Bankers Group, noting that this would make FHA loans more affordable.
Forbes Advisor contacted HUD about whether the loan term MIP requirements would change, but the agency would not make any promises.
“Prior to deciding to reduce the annual MIP rate, FHA evaluated all components of its mortgage insurance premium pricing. Given current economic conditions, at this time FHA’s primary goal in reducing annual MIP pricing is to provide maximum monthly mortgage obligation relief for new borrowers,” HUD said in an emailed statement.
