Just when we thought the surprises were over in the FHA market, home buyers who will be closing after October 4 will see increased mortgage insurance premiums. Don’t be lulled into thinking you are realizing savings because the closing costs are lower – it’s just creative accounting 101 from HUD. Here’s what’s actually happening with mandatory mortgage insurance (MMI):

  1. The cost of FHA mandatory insurance is increasing – from 55 to 90 basis points on a 15 year mortgage
  2. The up-front payment at closing is now 1%, down from 1.75%
  3. The higher premium will be spread out over the life of the loan
  4. The statutory cap rate has been raised to 1.55%
  5. Home Equity Conversion Mortgages (HECM) are not affected

The FHA tells us that the new policy will add $300M each month to its insurance fund, but some economists disagree. The changes are part of a sweeping set of policy changes announced by the FHA last January that are supposed to strengthen the status of the insurance program and assist FHA lenders in their struggle with defaults and other losses.

The new policy, which was originally slated to take effect last week, is also causing some confusion among lenders – so buyers beware. Make sure you understand the details of your mortgage insurance and what the actual costs are and don’t be afraid to ask questions.