New FHA Insurance Rules May Affect Your Financing

Recent changes in FHA mortgage insurance provisions will make a difference when you’re deciding what loan program you want to use to finance your home.

Lenders acquire mortgage insurance to protect themselves against customers who default on their loans. With an FHA loan, customers pay the mortgage insurance premium as part of their monthly payments.

Until recently, monthly mortgage insurance on 30-year FHA mortgages had to be in place for a minimum of five years before it could be removed, regardless of the value of the loan or the property.  If the mortgage balance reached 78 percent of the original loan amount, the mortgage insurance provision was withdrawn automatically, and homeowners were no longer required to pay mortgage insurance premiums. Now this rule has changed.

As of June 2013, monthly mortgage insurance on new FHA 30-year mortgages with less than 10 percent down payments must be in place for the entire term of the loan.  However, if the mortgage is either refinanced into a non-FHA mortgage – where mortgage insurance premiums aren’t required – or paid off through sale of the property, this doesn’t apply.  Also, if the down payment is 10 percent or more, the mortgage insurance can be removed after 11 years.  Potential homebuyers will want to consider this when they decide on their long-term financial strategy, as the cost of years of extra mortgage insurance premiums can have a major impact on anyone’s financial strategy.

Be aware that in conventional mortgages where mortgage insurance applies, the premiums are relatively less expensive; however, the credit and down payment provisions are somewhat more restrictive than with FHA. As well, current interest rates on FHA mortgages are, for the most part, lower than those on conventional mortgages.  All these factors need to be considered when selecting a mortgage. Your mortgage professional can help you decide how to develop the right financial strategy for your own situation.

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