The Department of Housing and Urban Development has announced a 30 basis point reduction to the Federal Housing Administration’s mortgage insurance premium, which many stakeholders believe is a long-awaited move.
This cut brings premiums down for the typical FHA user from 85 basis points to 55 basis points, returning them to a level that hasn’t been seen since before the 2008 housing crisis.
In this article, we will review the fundamentals of what the FHA MIP program is, how it helps home buyers, and what the changes in the monthly MIP mean to buyers, current homeowners, and the housing industry as a whole.
Introduction to FHA and Mortgage Insurance Requirement
The Federal Housing Administration (FHA) is a government agency that was established in 1934 to help increase homeownership in America. The FHA provides mortgage insurance for loans made by FHA-approved lenders to homebuyers who meet certain criteria. The FHA does not actually lend money to homebuyers; rather, it insures the loans made by lenders.
Mortgage insurance is a requirement for homebuyers who make a down payment of less than 20%. The purpose of mortgage insurance is to protect the lender in case the borrower is unable to make their mortgage payments. The FHA requires mortgage insurance on all of its loans, regardless of the down payment amount.
Many first-time home buyers, especially those with low down payments and/or less-than-ideal credit, typically will end up qualifying for FHA financing as the only option, and as a way to get their foot in the door of homeownership. By making FHA loans more affordable, present and future generations will be able to benefit from home purchases made by today’s home buyers.
What are FHA Mortgage Insurance Premiums (MIP)?
FHA mortgage insurance premiums (MIP) are monthly premiums that borrowers pay to the FHA to insure their loans. FHA has two forms of mortgage insurance on all loans; MIP is paid upfront at closing and on a monthly basis as part of the borrower’s mortgage payment. For the typical FHA home buyer, the upfront MIP fee is usually 1.75% of the loan amount, and the monthly MIP fee is 85 basis points of the loan amount, up to now. The newly announced reduction will be effective on March 20th of 2023. Upfront MIP as well as monthly MI will vary depending on factors such as loan term, property location, and down payment amount.
Purpose of FHA MIP Program
The FHA MIP program protects lenders in case of default by borrowers by providing insurance against losses due to default. The MIP program serves as a funding source to make lenders whole in the event of default by borrowers.
If a borrower defaults on an FHA-backed loan, the lender can file a claim with the FHA to recover some or all of the losses. The FHA Mortgage Insurance encourages lenders to offer FHA-backed loans to borrowers who may not meet the strict underwriting requirements of traditional mortgages, as the FHA assumes some of the risk of default.
Reasons for Cut in MIP
Lower premiums for qualified FHA borrowers will create more opportunities for homeownership by reducing their mortgage payments.
The FHA’s announced reduction in its MIP fees for homebuyers is one step forward in making homeownership more affordable and accessible to more Americans. The reduction in MOP will offer some relief from the recent surge in mortgage rates and home prices, which is particularly beneficial for the spring home-buying season.
The White House, in a statement released recently, highlighted that the MIP cut would translate to an average housing cost reduction of $800 for approximately 850,000 homebuyers and homeowners in 2023.
How Does MIP Cut Impact Homebuyers and Current Homeowners?
The reduction in MIP fees will make homeownership more affordable for homebuyers who use FHA loans. The reduction in MIP fees will result in lower monthly mortgage payments for new borrowers.
For current homeowners, the reduction in MI presents an opportunity to refinance and lower their payments, although this is quite limited at the moment given the current FHA interest rates.
First, let’s review the real-world impact of the MIP reduction for different types of FHA loans.
| Base loan amounts | LTV | Current MIP | New MIP | Term of MI duration |
| FHA Loans with terms of more than 15 years | ||||
| Up to $726,200 | 90% or lower | .80 | .50 | 11 years |
| 90.01 to 95% | .80 | .50 | Loan Term | |
| 95% or higher | .85 | .55 | Loan Term | |
| Over $726,200 | 90% or lower | .100 | .70 | 11 years |
| 90.01 to 95% | .100 | .70 | Loan Term | |
| 95% or higher | .105 | .75 | Loan term | |
FHA Loans with terms of 15 years or less | ||||
| Up to $726,200 | 90% or lower | .45 | .15 | 11 years |
| Over 90% | .70 | .40 | Loan Term | |
| Over $726,200 | 78% or lower | .45 | .15 | 11 years |
| 78.01 to 90% | .70 | .40 | 11 years | |
| Over 90% | .95 | .65 | Loan Term | |
The above changes apply to all Mortgages except:
- Streamline Refinance and Simple Refinance Mortgages used to refinance a previous FHA endorsed Mortgage on or before May 31, 2009
- Hawaiian Home Lands (Section 247) do not require Annual MIP
Now let’s look at some actual loan amounts to see how the new reduced MI premiums impact monthly mortgage payments.
| Loan Amount | Current MI rate | Monthly MI payment | Reduce MI rate | Reduce MI Payment | Monthly Savings |
|---|---|---|---|---|---|
| $250,000 | .85 | $177 | .55 | $115 | $62 |
| $450,000 | .85 | $319 | .55 | $206 | $113 |
Taking into consideration that the median sales price in the US in the 4th quarter of 2022 was a whopping $467,700 — we can extrapolate and arrive at the conclusion that a savings of about $1,200 a year will be realistic for many homebuyers in 2023.
What to Do If You Already Have an FHA Loan with Higher MIP
Homeowners who currently have an FHA loan with higher MIP rates should consider refinancing their loan, if current mortgage rates are same or lower in comparison. Refinancing to a new FHA loan with lower MIP fees could result in significant savings on monthly mortgage payments.
Conclusion
The latest cut to the FHA MIP program represents a significant step towards making homeownership more accessible and affordable for more people. By reducing the cost of monthly insurance premiums, HUD has made it easier for low- and moderate-income borrowers to secure mortgages with more favorable terms. The cut in MIP rates will help both, new homeowners and many current homeowners who may be able to refinance and get a lower overall monthly payment.