Bad news for FHA home buyers: On April 1 your costs are going up, and that’s no joke.
As required by the Temporary Payroll Tax Cut Continuation Act of 2011, FHA will increase its annual mortgage insurance premium (MIP) by 0.10 percent for loans under $625,500 and by 0.35 percent for loans above that amount. (FHA has an upper limit of $729,750 in the metro DC area.) Additionally, upfront mortgage insurance premiums (UFMIP) will also increase by 0.75 percent beginning June 1, 2012. Currently the UFMIP is one percent. (NB: Loans that are assigned a case number prior to the effective dates will have the old rates.)
Doing the math, that means that a buyer of a $400,000 home, with a loan of 96.5% of that amount (typical for FHA) will pay almost $2900 more at settlement for the upfront MIP, and an extra $386/year in annual premiums. Ouch. With closing costs typically around 2-3% in our area, that is a very significant cost at closing. Buyers will still have the option to finance that ‘upfront’ portion by rolling it into the loan balance BUT total contribution from seller is limited to 3%, down from the current 6%.
This is the latest in a string of rising premiums for FHA loans as they try to rebuild their capital reserves. There were also large increases in October 2010 and April 2011. FHA loans are a very popular choice for today’s buyers because they require significantly smaller down payments (3.5%) than private loan options, which range from 5-20%, require. Credit requirements are also less stringent.