On January 8, 2015, President Obama announced that there will be a .5 percentage-point drop in FHA’s annual Mortgage Insurance Premiums (MIPs) as the current annual premium of 1.35% will be reduced to .85%. The current up-front MIP of 1.75%, which is typically financed into the overall mortgage amount, will remain unchanged. It is estimated that the reduction in the annual MIP will result in a savings on average of approx. $900 per year for new borrowers.
The timing of this change could not be any better as Fannie Mae recently rolled out its 97% financing option for first-time borrowers. Preliminary reports indicate that this new 97% financing option is becoming quite popular and was expected to greatly impact FHA loan production in 2015.
The other good news involving FHA financing is that, effective for loan transactions that close on or after January 21, 2015, FHA is eliminating post-payment interest charges. In this regard, HUD/FHA had a policy in place for many years that allowed lenders to charge a borrower interest on their loan through the end of the month when the mortgage was paid in full before the end of the month.
As a result of this new change in policy, FHA lenders must accept a prepayment of an FHA loan at any time and can only charge interest through the date of payoff. In short, monthly interest on the debt must be calculated on the actual unpaid principal balance of the mortgage as of the date the prepayment is received and not of the next installment due date.
The effective date of the reduction in annual MIP should be announced shortly and is expected to be implemented soon. These rather substantial changes in FHA policies should result in more market share for FHA financing in 2015. The real winners will be prospective first-time homebuyers as they will now have some good financing options to choose from when purchasing their first home.
Perhaps we will begin to see those much talked about Millennials (those aged 18 to 34) give serious consideration to becoming homeowners – the housing recovery depends on it!