On February 22, 2023 the Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), announced a 30 basis point reduction to the annual mortgage insurance premiums (annual MIP) charged to homebuyers who obtain an FHA-insured mortgage.
The reduction will benefit an estimated 850,000 borrowers over the coming year, saving these families an average of $800 annually.1
What is MIP?
MIP, or Mortgage Insurance Premiums, is required on all FHA loans, regardless of down payment. There are 2 parts of MIP:
Upfront MIP, which is paid at closing (or rolled into the loan amount)
Annual MIP, which is paid annually and broken into 12 monthly payments added into your mortgage payment.
The FHA is reducing the amount of the annual MIP but not the upfront MIP. The annual MIP is dependent on several factors:
Your loan-to-value ratio
Loan amount
Loan term length
Based on these factors, your annual MIP can run anywhere from a minimum of 11 years up to the life of the loan, which means this reduction in the basis points for annual MIP can translate into tens of thousands of dollars in savings for FHA mortgage holders.
Who Benefits the Most
Buyers with FHA-backed mortgages comprised 7.5% of home sales in the third quarter of 2022, according to NAR data. FHA loans are popular among first-time and low- to moderate-income home buyers because they offer low down payment options. Eighty percent of FHA borrowers are first-timers, and more than 25% are minorities.2
The annual mortgage insurance premium reductions are effective for mortgages endorsed by FHA on or after March 20, 2023.
Annual MIP Reduction Details
The annual MIP reduction will apply to almost all Single Family mortgages insured by FHA. The reduction applies to all eligible property types, including single family homes, condominiums, and manufactured homes, all eligible loan-to-value ratios, and all eligible base loan amounts.
Example Scenarios
The average FHA borrower purchasing a one-unit single family home with a $265,000 mortgage will save approximately $800 this year as a result of FHA’s premium reduction. For the same borrower with a mortgage of $467,700 – the national median home price as of December 2022 – FHA’s annual MIP reduction will save them more than $1,400 in the first year of their mortgage.3
Additional Beneficial Changes
Additionally, HUD and the Biden-Harris Administration have changed FHA’s underwriting policies to allow lenders to use positive rental history in evaluating applicants’ creditworthiness for an FHA-insured mortgage – making it easier for first-time homebuyers to qualify. In addition, HUD expanded the tools for access to housing counseling so consumers can more easily find and seek assistance from more than 1,500 HUD-approved housing counseling agencies and the 4,000 HUD-certified housing counselors. HUD changed the way in which student loan debt is evaluated in FHA mortgage underwriting, enabling more borrowers making payments on student loans to qualify for an FHA-insured mortgage.4
References
1 – HUD.gov 2 – nar.realtor 3 – HUD.gov 4 – HUD.gov