FHA Issues Guidance on MIP Hikes and Cancellations
Borrowers who apply for an FHA-insured loan in June will have to pay annual mortgage insurance premiums for the entire life of the loan, according to the Federal Housing Administration.
FHA is rescinding its current policy that allows automatic cancellation of the MIP payments once the LTV ratio on the loan hits 78%.
This rescission goes into effect for loans that are assigned case numbers on June 3 and after, according to mortgagee letter 2013-04.
The financially strapped FHA mortgage insurance fund is taking this step to increase revenue and in response to pressure from Congress.
FHA guarantees 100% of the loan amount and it still has to pay claims on defaulted loans with 50% LTVs.
“Therefore, FHA will once again collect premiums based upon the unpaid principal balance for the entire period for which FHA is entitled. That will permit FHA to retain significant revenue that is currently being forfeited prematurely,” the agency said.
The mortgagee letter also notified lenders that FHA is increasing annual premiums by 5 basis points to 10 bps starting April 1.
On a standard FHA loan of no more than $625,000 and less than 5% down, borrowers will pay a 135 bp annual premium, up 10 bps from the current rate.
FHA also is tightening its underwriting requirement on loan applicants with credit scores below 620 and total debt-to-income ratios greater than 43%.
Starting April 1, these loans must be manually underwritten, according to mortgagee letter 2013-05. Less than 5% FHA loan originations involve borrowers with credit scores below 620.