The Federal Housing Administration (FHA) has announced it will reduce the annual premiums most borrowers will pay by a quarter of a percent. This move will provide homeownership opportunities to creditworthy borrowers who are overlooked by conventional lenders, according to Realtor officials.
FHA is reducing its annual mortgage insurance premium (MIP) by 25 basis points for most new mortgages with a closing/disbursement date on or after January 27, 2017. FHA's new premium rates are projected to save new FHA-insured homeowners an average of $500 this year.
"With recent hikes in interest rates, the expected average savings of $500 this year will help offset the higher cost of homeownership for many prospective home buyers and put them on the path to achieving the American dream," said California Association of Realtors president Geoff McIntosh.
FHA mortgages are important for low- and moderate-income buyers in particular because a lower down payment is required than with many conventional mortgage options. Buyers with lower credit scores may find more favorable treatment with an FHA loan than a conventional product as well.
"Lower private mortgage insurance helps the first-time home buyer qualify for financing and access the housing market. It's a relief for those who, though creditworthy, cannot come up with 20 percent down," said Denise Welsh, a Realtor with Alain Pinel Realtors Los Altos. Welsh will be installed as 2017 president of the Silicon Valley Association of Realtors on Jan. 19.
FHA's decision to reduce annual premiums reflects the fourth straight year of improved economic health of its Mutual Mortgage Insurance Fund (MMIF), which gained $44 billion in value since 2012. Following the Great Recession, FHA increased its monthly mortgage insurance premium from 55 basis points to 90 basis points, then by April 2013 to a full 1.35 percent. The move reflected post-recession concerns over credit risk and the need to strengthen FHA's Mutual Mortgage Insurance Fund. Since then, the MMIF has shown continued good health, including achieving a capital reserve ratio of over 2 percent for two years in a row. In light of that strength, the FHA reduced premiums to 85 basis points in January 2015, and has since advocated for a further reduction.
"FHA mortgage products exist to serve an important mission: providing homeownership opportunities to creditworthy borrowers who are overlooked by conventional lenders," said National Association of Realtors president William E. Brown. "The high cost of mortgage insurance has unfortunately put those opportunities out of reach for many young, first-time- and lower-income borrowers. Now, we have a real opportunity to get back on track."
Realtors have long advocated for lower FHA mortgage insurance premiums. "Every time we cut the cost of mortgage insurance it means more borrowers meet the debt-to-income ratio required to purchase a home," explained Brown. "It follows that dropping mortgage insurance premiums today will mean a whole lot more responsible borrowers are suddenly eligible to purchase a home through FHA. That puts more money in the fund to protect taxpayers, and it puts more families in homes so they can live out the American dream."
Realtors continue to encourage efforts to make homeownership less costly. Along with lower mortgage insurance premiums, Realtors are advocating for the elimination of FHA's "life of loan" mortgage insurance requirement. This requirement forces borrowers to maintain mortgage insurance on an FHA-insured property regardless of their equity position. Borrowers with traditional mortgage insurance can typically eliminate their mortgage insurance once they reach 20 percent equity in the property.
The Silicon Valley Association of REALTORS® (SILVAR) is a professional trade organization representing over 4,000 REALTORS® and Affiliate members engaged in the real estate business on the Peninsula and in the South Bay. SILVAR promotes the highest ethical standards of real estate practice, serves as an advocate for homeownership and homeowners, and represents the interests of property owners in Silicon Valley.
The term "REALTOR®" is a registered collective membership mark which identifies a real estate professional who is a member of the National Association of REALTORS® and who subscribes to its strict Code of Ethics.
Variations of this article have appeared in local area newspapers.
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