One of the biggest buyer needs is a low down payment and this is especially true with first time home buyers. Fortunately since 1934, FHA has been helping buyers achieve the dream of home ownership. A cornerstone feature of FHA loans is the low down payment. But, banks and mortgage companies typically do not offer low down payment home loans without insurance to back the loan. That’s where FHA PMI comes into play. PMI is short for private mortgage insurance and it guarantees the lender’s loan in case of foreclosure. Technically, FHA mortgage insurance is called MIP or mortgage insurance premium. Although, PMI is not just to protect lenders. Without it, buyers would be required to put down 20% or more down payment. So, this portion of a buyer’s monthly mortgage payment is a key point to understand.
Although FHA PMI has not changed since January 26, 2015, it had made several up and down changes before that. Every once in a while the conversation comes up about FHA lowering their mortgage insurance or even allowing it to cancel in a more borrower friendly way. There is good reason for this because buyers who put down less than 10% down payment on a 30 year FHA loan will have PMI for the entire history of the loan. Contrary to that, conventional loan PMI may come off once the balance is paid under 80% of the original purchase price.
Breakdown of Last FHA PMI Change
During the housing crisis and economic meltdown, foreclosures were quickly on the rise and home values dropped dramatically. The result is many lenders went out of business and the FHA reserve fund was rapidly depleting. In order to build up the reserves again, FHA PMI and the FHA up-front funding fee had to change. Fortunately, this change plus a healthier real estate market put FHA in a better position again. Now keep in mind, FHA is not an organization paid by the tax payer. Actually, the program is funded by the fees it brings in through the two forms of PMI.
Once FHA was on a stronger path and the economy needed a further boost, the decision was announced by HUD (Department of Housing and Urban Development) to reduce the monthly mortgage insurance premium by over 1/3. Prior to this reduction, many buyers were surprised that FHA monthly payments were higher than other loan options even though the rate was lower. The reason is the PMI was so high. But once the PMI rate was lowered, this provided a much needed shot in the arm for buyers, homeowners, and the real estate market. After this reduction, that is where FHA PMI has stayed so far.
Future of FHA PMI
There has been much debate over making additional changes to FHA PMI. Most of the conversation involves either lowering the monthly mortgage insurance premium or allowing it to be cancelled at a certain point. First of all, lowering the monthly PMI has a direct effect on lowering the monthly mortgage payment. Of course, buyers and refinancing homeowners want this. Opponents of FHA PMI reduction quickly point out that FHA barely has enough funds to cover its mandated minimum reserve levels. Thus, if the market were to have another downturn, FHA could have the need for a bailout like other organizations needed before.
How to Get Rid of FHA PMI
Cancelling FHA monthly mortgage insurance is a very misunderstood topic. Partially because FHA used to allow PMI to cancel after 5 years and also many mix up the conventional PMI guidelines which allow PMI to drop. The current cancellation rules are pretty restrictive. Buyers with less than 10% down payment will continue to pay FHA PMI through the entire term of the loan. At least, the amount of PMI does go down each year based on the updated loan balance.
Both of these areas will continue to be hot topics in the future. In order for either of these consumer improvements to happen, it would be best for the FHA reserve fund balance to get to a higher and safer level. Although, politics could play into this decision and it could lower solely for that reason. At least for the foreseeable future, an increase in FHA PMI is not expected. Below are the details of the last FHA PMI decrease.
Highlights the Latest FHA Mortgage Insurance Premium Reduction
- Effective for all FHA case numbers assigned on 1/26/15 or after
- All other rules still apply such as length of time MIP continues. Click here to see length of MIP
- Applies only to mortgage terms over 15 years. So the 10 and 15 year MIP stays the same & are lower than 20 – 30 year MIP
Example of the lower MIP’s affect on a payment:
Purchase price of $200,000 and borrower putting down the minimum 3.5%. MIP prior to 1/26/15 = $220.92 per month. MIP on or after 1/26/15 is $139.10 which saved a whopping $81.82 per month.
Terms > 15 Years
| Base loan amount | Loan to value | Previous MIP | New MIP |
| < $625,500 | < 95% | 1.30 | .80 |
| < $625,500 | > 95% | 1.35 | .85 |
| > $625,500 | < 95% | 1.50 | 1.00 |
| > $625,500 | > 95% | 1.55 | 1.05 |
Terms 15 Years or Less
| Base loan amount | Loan to value | Previous MIP | New MIP |
| < $625,500 | < 90% | .45 | .45 |
| < $625,500 | > 90% | .70 | .70 |
| > $625,500 | < 90% | .70 | .70 |
| > $625,500 | > 90% | .95 | .95 |
