The Department of Housing and Urban Development (HUD) recently announced that it’s lowering the annual mortgage insurance premium for Federal Housing Administration (FHA) loans from 0.85% to 0.55%.
This is great news for those hoping to purchase a home with an FHA loan, as well as those with an existing FHA loan who would like to refinance.
What's in this article?
Let’s dig into the details, including why the HUD is reducing costs and how it will benefit you.
What are mortgage insurance premiums?
Anyone who purchases a home with an FHA loan must pay mortgage insurance premiums (MIP).
Borrowers must pay an upfront MIP at closing and an annual MIP that is included in the monthly mortgage payment amount. The annual amount is a percentage of the loan balance.
MIP is the key to an FHA loan’s greatest benefits, including its flexible credit requirements and low down payment allowance. It offers protection to lenders in exchange for more flexible options.
These benefits make FHA loans an ideal option for first-time homebuyers, especially in today’s market.
However, today’s higher interest rates and home prices have made homeownership less accessible for many borrowers.
As a result, the HUD, through the FHA, made the move to reduce annual MIP by 30 basis points (or 0.3%) to make homeownership more accessible. This is an annual average savings of $800 per family.
What’s the difference between MIP and private mortgage insurance (PMI)?
Private mortgage insurance (PMI) is for conventional loans that aren’t backed by the government, while MIP is exclusively for FHA loans.
Conventional loans meet the necessary requirements set by government-sponsored entities Fannie Mae and Freddie Mac, rather than a government program.
Generally, PMI is required on conventional loans that have a down payment lower than 20%. If the borrower puts down 20% on a conventional loan or when they achieve 20% equity in their home, PMI is no longer required.
On the other hand, if borrowers put down less than 10% on an FHA loan, they will pay MIP for the life of the loan. If they put down 10% or more, they must pay MIP for 11 years.
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What does the Federal Housing Administration do, and why are they lowering costs?
The Federal Housing Administration is a part of HUD, the U.S. Department of Housing and Urban Development. FHA provides mortgage insurance on loans for FHA-approved lenders to protect against losses.
FHA-backed loans are less of a risk to lenders, so they can provide more mortgages to more borrowers.
The FHA insures mortgages on the following property types:
- Single-family homes
- Multifamily properties
- Residential care facilities
- Hospitals
According to the HUD press release, the cost reduction “supports the Biden-Harris Administration’s goals of making homeownership more accessible and affordable for the nation’s working families.”
HUD Secretary Marcia L. Fudge said they are working to ensure that people feel comfortable purchasing a home as they build toward their future while addressing “longstanding disparities” in homeownership.
How will the lower insurance premiums benefit you?
Lower annual MIP helps borrowers access lower overall savings, but it also helps more people qualify for a mortgage in the first place.
To access the lower insurance premiums, you will have to do one of the following:
- Purchase a home with an FHA loan
- Refinance your current FHA loan
If you purchase a home with a $265,000 mortgage, you will save about $800 this year as a result of the cost reduction, according to the press release.
If you purchase a home with a $467,700 mortgage, which is the national median home price as of December 2022, the cost reduction would save you more than $1,400 in the first year of homeownership.
How to get an FHA loan
To get an FHA loan, you’ll have to apply for a loan with an FHA-approved lender such as Compass Mortgage.
In exchange for the FHA loan benefits, borrowers must meet certain requirements, including:
- Credit score of around 580 or higher
- Documentation of consistent income and employment
- Debt-to-income ratio (DTI) at or below 50%
- Down payment of 3.5% or higher
The home must be the buyer’s primary residence, and it must meet the minimum property standards which assess the following aspects of the home:
- Safety
- Security
- Soundness
- Structural integrity
Additionally, the buyer must move in within 60 days of closing.
Borrowers must also remember to account for closing costs, which cover the loan origination fees, appraisal, upfront MIP, title insurance and other related expenditures. These costs typically range from 1% to 3% of the total loan amount.
Apply for an FHA loan today with Compass Mortgage
If you’re ready to take advantage of the new savings available to you with an FHA loan, the first step is to apply for pre-approval with Compass Mortgage.
In today’s high-competition environment, Compass Mortgage puts you in the best possible position to get the offer accepted for the home you truly want with our Get Committed® program.
Standard pre-approval vs. the Compass Get Committed® program
There’s a big difference between standard pre-approvals and Get Committed®.
With standard pre-approvals, you haven’t secured a loan yet. But Get Committed® guides borrowers through the steps in the loan process to secure a fully underwritten loan commitment before they even make an offer on a home.
A loan commitment essentially has the power of a cash offer, proving to the seller that you’re fully approved financially and that your deal isn’t likely to fall through.
This means that you have resolved any financial requirements before the added pressure of closing the loan.
Apply here to get started, or reach out to our team to discuss your next steps.
We can’t wait to help you get into the home of your dreams, with a loan you can afford.