Low- to moderate-income homebuyers will get a boost in 2017, with the Federal Housing Administration (FHA) set to cut mortgage insurance premiums later this month.
The move “will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA,” said National Association of Realtors President William E. Brown in a statement.
Annual premiums going down
The FHA will reduce the annual mortgage insurance premium most FHA borrowers pay by a quarter of a percentage point starting January 27. Annual premiums will drop to 0.6 percent from 0.85 percent, according to NAR.
“Every time we cut the cost of mortgage insurance it means more borrowers meet the debt-to-income ratio required to purchase a home,” said Brown, explaining why the move should lead more aspiring homebuyers to pull the trigger.
The rate cut means new borrowers who take out mortgages insured by the FHA will save an average of $500 this year, according to HUD.
The action “comes at the right time for consumers who are facing higher credit costs as mortgage interest rates are increasing,” according to Julián Castro, the U.S. Housing and Urban Development (HUD) Secretary, which oversees the FHA.
Why this is good news
The FHA makes it possible for banks to lend to borrowers who might not qualify for conventional mortgages, serving as a wellspring of credit for those buyers.
FHA borrowers pay both an insurance premium to the FHA and higher interest rates in return for a mortgage that requires as little as a 3.5 percent down payment.
“FHA mortgage products exist to serve an important mission: providing homeownership opportunities to creditworthy borrowers who are overlooked by conventional lenders,” said NAR President William E. Brown in a statement.
“The high cost of mortgage insurance has unfortunately put those opportunities out of reach for many young, first-time- and lower-income borrowers. Now, we have a real opportunity to get back on track.”
“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” Castro said in a statement.
“This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”
According to Guy Cecala, CEO and publisher of Inside Mortgage Finance, FHA’s share of the home purchase market in first three quarters of 2016 was 16.6 percent.
“That was way down from the 33.8 percent market share seen as recently as 2010, but up from the 13.5 percent share seen right before FHA first lowered its annual MIP in early 2015,” Cecala told Inman via email.
Can FHA afford to do it?
The health of the FHA’s Mutual Mortgage Insurance Fund (MKIF) has improved for four straight years, gaining $44 billion in value since 2012, according to HUD. The fund pays FHA lenders when borrowers default on FHA-insured mortgages.
An independent analysis found that the fund’s capital ratio now stands at 2.32 percent of all insurance in force — the second consecutive year since 2008 that the FHA’s reserve ratio exceeded the mandatory 2.0 percent threshold, HUD said.
The FHA started insuring a much larger share of purchase mortgages to help fill a credit void after the mortgage meltdown.
Losses largely stemming from loans the FHA made from 2007 to 2009 forced the agency to take a bailout of $1.7 billion in 2013 to ensure it had enough reserves to cover anticipated losses on the loans it insured.
“We’ve carefully weighed the risks associated with lower premiums with our historic mission to provide safe and sustainable mortgage financing to responsible homebuyers,” said Ed Golding, principal deputy assistant secretary for HUD’s office of housing, in a statement.