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Serious savings are coming to some mortgage borrowers in March. The Biden Administration has announced that it will slash mortgage insurance premium fees by 0.30 of a percentage point—from 0.85% to 0.55%—for mortgages backed by the Federal Housing Administration (FHA).
The savings will average $800 per year and will benefit some 850,000 homebuyers and homeowners in 2023, according to the Biden administration. The reduction applies to all FHA loans originating after March 20, 2023.
This is a meaningful reduction in rates that will improve access for a wide range of borrowers, says Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
“In a time when we’re trying to close the homeownership gap between Black and Hispanic homeowners and white homeowners, FHA is needed to close that gap,” Broeksmit says. “And this reduction will help that much more.”
But not all FHA borrowers will get the discount.
Who Qualifies for the FHA Discount?
FHA borrowers pay an annual mortgage insurance premium (MIP), regardless of their down payment amount, in order to protect lenders who originate FHA loans.
Thanks to this policy change, new FHA borrowers will pay a reduced MIP of only 0.55%—down from 0.85%—for the life of the loan or until they refinance into a conventional mortgage.
Borrowers must also pay an upfront mortgage insurance premium (UFMIP), a one-time fee that’s equal to 1.75% of the loan amount and can be rolled into your mortgage. But this second mortgage insurance premium is not affected by the new policy.
Borrowers who already have FHA loans won’t qualify for this discount. In other words, this reduction is not retroactive.
How Much Will FHA Borrowers Save?
The amount borrowers can save through this MIP reduction of 30 basis points will depend on the size of their mortgage. Those who borrow more will end up saving more.
Here’s a snapshot of savings on median listing prices in a few metro areas. (Down payments and other associated costs, such as taxes, have not been included in the calculation.)
|City||Loan Amount||MIP Annual Savings|
Source: St. Louis Federal Reserve, median listing prices as of February 2, 2023
The reduced premiums give borrowers more flexibility. They can use the extra money from the discounted fee to either increase their buying power or improve their chances of getting approved for a loan.
“When lenders qualify people for a loan, they’re looking at how much money the prospective homebuyers earn versus how much the loan will cost. So if the loan is cheaper, they don’t have to earn as much money to qualify,” Broeksmit says.
Further Reductions for FHA Borrowers Unclear
Lowering the annual MIP is a significant step toward making loans more affordable for first-time homeowners and low- to mid-income buyers. Yet many industry and advocacy groups are calling for additional savings for FHA borrowers—namely, the removal of the life-of-the-loan MIP requirement.
Mortgage insurance on all types of loans—including conventional loans, the most popular financing option—is often required to protect lenders against defaults. This insurance is required on conventional loans with less than a 20% down payment. Once 20% equity is reached, the insurance is automatically removed from conventional loans. In other words, it’s gone once the loan-to-value ratio hits 80%.
This is not the case for FHA loans. FHA borrowers are required to pay MIPs for the life of the loan, even when a loan is not considered risky by most lenders’ definitions.
This additional cost can be a burden to FHA borrowers. Several organizations, including the Mortgage Bankers Association, the NAACP and the National Housing Conference, have called on the U.S. Department of Housing and Urban Development (HUD) to ease up.
“We will continue to advocate with HUD for changing the life-of-loan insurance requirement,” says Broeksmit, of the mortgage bankers group, noting that it would make FHA loans even more affordable.
Forbes Advisor reached out to HUD on whether the life-of-the-loan MIP requirement might change. But the agency wouldn’t make any promises.
“FHA evaluated all components of its mortgage insurance premium pricing before making the determination to reduce the annual MIP rate. Given current economic conditions, at this time, FHA’s primary goal in reducing annual MIP pricing was to offer new borrowers maximum relief on their monthly mortgage obligations,” says HUD in an emailed statement.