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If you’re buying a home but don’t have much of a down payment, the FHA mortgage program is your friend — and according to the government’s latest numbers, your friend is loaded.
The Federal Housing Administration, or FHA, backs FHA loans so that more borrowers, especially first-time homebuyers, can obtain mortgages. With an FHA loan, you can purchase a home for just 3.5 percent down with a credit score as low as 580.
FHA doesn’t create or fund these loans directly — agency-approved lenders do — but it does insure them against default. As the borrower of an FHA loan, you pay mortgage insurance premiums, known as MIP, to help ensure this coverage.
MIP is expensive, however, and some voices in the mortgage industry have raised concerns about costs. The latest FHA balance sheet might help those concerns gain traction in 2023.
FHA fund by the numbers
For the fiscal year ending Sept. 2022, FHA reported $141.7 billion in cash on hand in its Mutual Mortgage Insurance Fund (MMIF). That’s an increase of $41.2 billion from the previous year.
This fund is required to have a 2 percent reserve ratio — in other words, maintain 2 percent of all possible insurance claims. As of the end of September, the MMIF had a reserve ratio of 11.11 percent, more than five times the minimum required level. FHA projected annual claims to cost $10.1 billion, but the fund as it stood insured enough loans to total $1.275 trillion.
How FHA insurance premiums work
FHA loan borrowers pay two types of insurance premiums:
- An upfront premium equal to 1.75 percent of the amount borrowed
- Annual premiums that vary based on the amount borrowed, the size of your down payment and the length of loan
If you borrowed $300,000 with an FHA loan, for example, your upfront premium would equal $5,250. You’ll pay this either when you close the loan or by financing it with the rest of the mortgage. If you got a 30-year $300,000 loan, say, and put down less than 5 percent, you’d pay 0.85 percent in annual premiums.
These FHA insurance charges add up. Between the upfront and annual premiums in the above example, you’d pay out roughly $10,000 in just the first two years of the loan.
Will FHA cut insurance premiums in 2023?
Is it time to lower FHA insurance premiums? This question could garner attention on Capitol Hill in the coming months. In September, four major industry trade groups penned a letter to the National Economic Council advocating for a premium cut:
Against the backdrop of robust FHA capital reserves and rapidly deteriorating affordability, it is critical for the Administration to ensure low to moderate-income and first-time homebuyers are not left behind.
Manufactured Housing Institute, Mortgage Bankers Association, National Association of Home Builders, National Association of Realtors
“Against the backdrop of robust FHA capital reserves and rapidly deteriorating affordability, it is critical for the Administration to ensure low to moderate-income and first-time homebuyers are not left behind,” the letter stated. “Lowering the MIP — with a focus on FHA’s recurring ‘annual’ premium — increases homebuyers’ purchasing power by reducing monthly payments and directly putting money into their pockets every month, giving them the opportunity to become homeowners and build generational wealth.”
While proponents argue that reduced premiums could only help the housing market at a time when rising mortgage rates have further cut into affordability, the growing probability of a recession could mean the opposite. If the economy slows, FHA’s reserves are likely to face increased claims. As of the end of September, just 4.77 percent of FHA loan payments were 90 or more days past-due, down from 11.9 percent in November 2020.
On the flip side, “reducing the MIP also allows borrowers the flexibility to spend on necessary items like food, gas, education, and other monthly bills,” the letter stated.
Ultimately, it might turn out that lower FHA premiums could help spur a slowing market, especially if home sales continue to decline and prices stagnate. With so many variables in the air right now, it remains to be seen whether FHA borrowers could get a break in the near future.