PhotoThe cost of things usually go up, not down, but the U.S. government's Federal Housing Administration (FHA) is reducing the yearly premiums for mortgage insurance by 25 basis points for most new mortgages closing on or after January 27.

When borrowers take out an FHA loan, they can borrow up to 96.5% of the home's purchase price. For any loan in which the borrower puts up less than 20% of the money, the borrower is required to purchase mortgage insurance.

Since the government is guaranteeing the loan, the mortgage insurance reimburses the government in the event of default. The mortgage insurance premium is added onto the borrower's monthly payment.

Saving $500 a year

That money goes into FHA's Mutual Mortgage Insurance Fund (MMIF), which has grown in value by $44 billion since 2012. U.S. Housing and Urban Development Secretary Julián Castro says that increase means type mortgage insurance premium will go down by $500 in 2017, lowering the typical FHA house payment by more than $41 a month.

Castro says 2016 marked the fourth straight year that the mortgage insurance fund significantly increased in value, largely because there have been far fewer FHA loan defaults since the housing market crash of 2008.

"The reduction in the premium is a result of our industry's and FHA's shared commitment to quality underwriting, and consumers will benefit as [a] result,” David Stevens, President & CEO of the Mortgage Bankers Association, said in a statement. “Reducing the cost of FHA loans benefits borrowers, but other changes to reduce uncertainty for lenders would be required to truly invigorate the FHA program.”

Castro said the decision to lower mortgage insurance premiums was made possible by the fact that current borrowers are doing a good job of managing their loans.

Passing on the savings

“After four straight years of growth and with sufficient reserves on hand to meet future claims, it’s time for FHA to pass along some modest savings to working families,” Castro said. “This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers.”

HUD officials say they carefully weighed the risks of lowering premiums and concluded the fund's value is more than adequate to reimburse the government in the event of default.

There have been significantly fewer foreclosures in recent years since mortgage lenders raised lending standards. Unlike the lower standards in place during the early 2000s housing bubble, borrowers must document income and employment and have higher credit scores.

Since the housing meltdown, Castro says FHA raised mortgage insurance premiums several times to increase the size of the MMIF. While it increased the health of the fund, he says it also significantly increased the cost of credit to qualified borrowers.

Now that the cost of mortgage insurance is coming down, National Association of Realtors (NAR) President William E. Brown says more consumers will be able to qualify for an FHA loan.

“This is a question of simple math,” Brown said. “Every time we cut the cost of mortgage insurance it means more borrowers meet the debt-to-income ratio required to purchase a home.”


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