Is FHA Mortgage Insurance Permanent?

FHA mortgage insurance has been required to be remove automatically when the current balance hits 78% of the original principle loan amount since 2001.

The removal of mortgage insurance may no longer be an option.  FHA mortgage insurance may be required as long as you have an FHA insured loan.

This is all part of HUD’s plan to remain financially healthy is to keep FHA home loans insured as long as you have FHA financing on your home.  This is the Monthly (annual divided by 12 months) premium fee that is added to your monthly home loan payment.

Here are the correlating quotes from the HUD portal website (Page 54):

“Revised Premium Cancellation Policy
Under a policy change made in 2001, FHA has been cancelling required mortgage insurance premiums (MIPs) on loans for which the outstanding principal balance reaches less than 78% of the original principal balance.”

However, FHA remains responsible for insuring 100% of the unpaid principal balance of a loan for the entire life of the loan, such loan life often extending far beyond the cessation of MIP payments.

As written, the timing of MIP cancellation is directly tied to the contract mortgage rate, not to the actual loan LTV.

The current policy was put in place at a time when it was assumed that home price values would not decline, but today we know that LTV measured by appraised value in a declining market can mean that actual LTVs are far lower than amortized mortgage LTV, resulting in higher losses for FHA on defaulted loans.

Analyses conducted by FHA’s Office of Risk Management projects lost revenue of approximately $10 billion in the 2010-2012 vintages as a result of the current cancellation policy. The same analyses also suggest that 10%-12% of all claims losses will occur after MIP cancellation.

This excerpt of the HUD document talks about reversing the automatic removal of FHA mortgage insurance at 78% loan to value (principle balance as percentage of original loan amount), and requiring mortgage insurance for the life of the loan.

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This will greatly change the way people feel about FHA financing.

Final Thoughts

I think it’s inevitable that annual MIP will increase in 2013, more than once.  I also think that the removal of mortgage insurance may change.  I am watching this one closely.

There have even been suggestions that MIP on FHA loans is required as long as you have an FHA mortgage.  That means you would now have to sell or refinance using conventional financing to get rid of FHA mortgage insurance.