The Difference Between New & Old FHA Rules

Just recently for Portland Home Loan, I prepared an analysis for 4 purchase scenarios on the same property.  It is a purchase of $300,000 here in Portland, OR, and the 4 options are:

– 5% down conforming
– 10% down conforming, and
– 2 FHA options

One FHA option is the current FHA cost structure, which has been in place since April of 2009.  The other option is the new FHA cost structure, which becomes unavoidable after October 4th of 2010.  FHA mortgage insurance has always been paid in two places on the loan:

  1. The monthly premium (which is discounted based on a large upfront lump sum), and
  2. The Upfront Mortgage insurance Premium (which is 2.25% of the loan amount and automatically added to, and financed into the life of the FHA mortgage.

The major change starting Oct 4th 2010  is a shift of the mortgage insurance cost away from that  “financed upfront premium” and more towards the monthly premium.

In short — FHA loans are about to become a little bit more expensive.

I have prepared an interactive FHA loan report that shows the breakdown more clearly.

The new Upfront FHA mortgage insurance premium will be reduced from 2.25% to 1% of the loan amount.  However, the monthly mortgage insurance cost will almost double — being increased from 0.55% annually to 0.90% annually.  In my example above, this shows up as a jump in payment of $69 per month on the same $300k mortgage.

Ultimately, FHA loans are still going to be amazingly popular, and continue to make a lot of sense for borrowers as we move forward.  They still have the smallest available down payment requirement (at 3.5%) as well as the most flexibility around borrower credit history.

But I do think that this change will make a loan with 5% down and private mortgage insurance more attractive to borrowers with top credit scores.  Additionally, the FHA streamline refinance will become much less attractive for many borrowers.  I am scouring my client list and the wider community for last-minute FHA streamline refinances! Last call for the good stuff!

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