Loans Just Got MORE Expensive

Loans Just Got MORE Expensive

Posted: 17 Feb 2011 04:00 AM PST

The administration recently announced increases to the insurance premiums that the Federal Housing Administration (FHA) charges. FHA is the dominant loan program in the marketplace today.  The FHA has two types of Mortgage Insurance Premiums – Up Front Mortgage Insurance Premium (UFMIP)  and the  Monthly Mortgage Insurance Premium (MMIP). Let’s see how these impact a borrower’s ability to purchase.

UFMIP is typically added to the loan amount and financed over the term of the loan. MMIP is part of the monthly mortgage payment for a minimum of five years and a maximum of fourteen, depending on the loan-to-value.

For the majority of FHA Insured loans, the MMIP will be increasing .25% effective April 18th which is, in effect, equivalent to a .25% increase in interest rates. The income ratios that lenders use in qualifying borrowers look at the total payment. Therefore, the MMIP hike has the same impact on affordability as a rate hike. Higher monthly costs mean lower loan amounts and lower loan amounts mean lower offers that borrowers can make on houses. This will translate into lower sales prices. Nothing is good in this news. The increase in Annual Mortgage Insurance Premiums for forward mortgage amortization terms is effective for case numbers assigned on or after April 18, 2011.

Now, in my market, the average sales price is double this example. A $66 increase in monthly cost is like a $12,000 reduction in borrowing power…which will eventually result in another 3% drop in home values. Cross your fingers that rates don’t surge up because it could perpetuate a slide in prices with no real value for buyers. Sellers get less (hurts the recovery) and buyers’ mortgage payments stay the same. AAAARRRGGGHHH!