FHA Cut Its Mortgage Insurance: What It Saves You Every Month

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Big changes to FHA, announced this morning

Hello and welcome. I’m Debbie Marcoux, the Mortgage Mom, and you’re watching Mortgage Mom Radio. We do this show once a week, every Wednesday, live on YouTube, Twitch and Facebook. We have big, big changes to FHA — the announcement came out today — and I am extremely excited about it.

Here’s the context. FHA is one of my favorite loans to write. It isn’t as strict on your debt ratio. It’s far more forgiving on credit score and on credit history, including bankruptcies. And FHA is known to have lower interest rates than a conventional loan, with three and a half percent down. The one thing holding it back was the mortgage insurance, which was more expensive than conventional mortgage insurance for a borrower with a really good credit score. So if you had strong credit and only three or five percent down, we tried to steer you conventional even though the rate was worse, because the FHA mortgage insurance cost you more every month.

What they announced is a reduction in the monthly mortgage insurance premium. That makes the payment more affordable, it helps you qualify for more, and it may let you buy at a higher sales price and keep the payment you wanted. Heather on my team built me a chart of the new monthly payments this morning so I’d have real numbers in the studio, and we’re going to go through them.

Who should be calling about a streamline refinance

If you have a current FHA loan and you’ve been wanting a lower payment, FHA allows a streamline refinance to capture the lower premium. We do need to look at your current mortgage first, because if your rate is very low, dropping the mortgage insurance may not be enough to make the refinance worth doing — going from a three percent rate to five and three quarters or six is not a trade I’m going to recommend.

But if you purchased or refinanced with an FHA loan any time since roughly June or July of 2022, do not pass go. Your interest rate is probably close to what’s available today, and your mortgage insurance is on the old schedule. Pick up the phone. Have your mortgage statement in hand, or pull it up on your phone, because we need your full all-in payment and the breakdown of your escrows to do the math honestly.

Change one: the high-balance threshold

Everyone in Los Angeles, Orange County, San Bernardino — you’ll understand this one. When your loan balance went over $625,000, the mortgage insurance premium was significantly higher than for a balance under it. They’ve moved that line up to about $726,000 before you hit the higher premium. That alone takes a lot of California borrowers out of the expensive tier.

Change two: the premium itself

Above that threshold, the monthly premium used to be 1.05%. They’ve brought it down to about three quarters of a percent. Percentages don’t mean much until you see a payment, so here are the numbers Heather ran, all with three and a half percent down.

On a $750,000 loan, the old mortgage insurance was $656 a month. Today it’s $469 — nearly two hundred dollars a month. On $800,000: $700 a month before, $500 now — exactly two hundred dollars. On $850,000: $744 before, $531 now.

Think about what that does. I have a client right now who says he doesn’t care what he qualifies for — he wants his payment at four thousand dollars a month, full stop, and he’s looking at a condominium with meaningful monthly HOA dues on top. To hold him at $4,000 all in, with taxes, insurance, HOA and mortgage insurance, his purchase price was about $475,000. It’s now about $525,000. That is fifty thousand dollars more house, at the same payment, in the next price bracket up.

Below the threshold

For loans under the limit, the monthly premium was 0.85%. It’s now 0.55%. To see why that matters, take the same borrower — a $600,000 property, great credit, say a 740 score, low down payment. Conventional mortgage insurance for that borrower would have been somewhere around 0.5%. So at 0.85% we wanted you conventional, even though FHA’s rate was lower, and we’d have to weigh rate against premium on both to see which program actually won. At 0.55%, FHA’s premium is right there next to conventional — so now you get the lower interest rate and a comparable premium.

The payments: a $600,000 loan was $425 a month in mortgage insurance at 0.85%; it’s $275 at 0.55%. A $650,000 loan was $460; it’s now $298. A $700,000 loan sat in the expensive 1.05% tier before, so it was somewhere around $600 a month; it’s now $321.

On average, for anybody with a mortgage of about $500,000 and up, we’re seeing roughly two hundred dollars a month in savings. Two hundred dollars is two hundred dollars — especially when the gas bill to heat your house is three or four hundred these days.

Who this helps

Anybody with a current FHA loan from mid-2022 onward, as I said. Anybody who recently took a conventional loan at a high rate — call and see what FHA looks like today. Really, anybody paying mortgage insurance at all.

And everybody holding a pre-approval who is out there actively looking: call and get it re-run. You heard the difference in those payments. If your monthly mortgage insurance is lower than it was when your pre-approval was written, you qualify for more. If you already have a lender you love, that’s fabulous, stay where you’re comfortable — but if they aren’t picking up the phone to tell you the numbers changed, come talk to us. This goes into effect on brand new applications and rate locks as of today, February 22nd.

Chapter 13, foreclosures, and why FHA is the do-over loan

Somebody asked me last week about getting a mortgage after a Chapter 13 bankruptcy — he’d been told he had to wait three or four years after discharge. A Chapter 13 is a reorganization rather than a wipe: you go to the court and say you want to repay what you can, and you’re assigned a three-, four- or five-year repayment plan, paying the court, which disburses to your creditors. It’s viewed with softer eyes than a Chapter 7.

With FHA, even if you are still in the middle of that payment arrangement, as long as you have twelve months paid, made on time, and you can prove it — assuming your score and income work — you have the opportunity to buy and be approved. Conventional will not do that. FHA’s waiting periods after a Chapter 7 are much shorter than conventional’s too, and on a foreclosure it’s four years with FHA against seven with conventional. That’s why I call it the do-over loan.

One more thing I love about it: FHA’s mortgage insurance doesn’t scale. Conventional mortgage insurance works like car insurance — everyone gets a different quote based on credit score, debt ratio, property type. With FHA, everybody gets the same monthly premium. You could be at the very top of the debt ratio FHA allows and you’re paying the same as the borrower with pristine credit. FHA loans get a bad rap and I’ve never understood why. Other than a VA loan — and not everyone served — it’s the best loan most people can get.

Q&A: minimum credit score

Fair Lady asks: “What is the lowest credit score I can have to do an FHA loan?”

FHA will allow a credit score down to 550. But FHA has their guidelines, and then the lenders funding the loan have their own, and not every lender will take on a 550. That makes it hard to find the right bank, and when we do, the rate is extremely high because pricing is risk-based — the better the score, the better the rate. So we like to say 580, because at 580 we have far more options and much better rates. Under 580 we can still talk; we do have banks that will do it. We can also look at your credit and tell you what to do to raise the score. The difference between 550 and 580 is night and day, and if you get to 600 the rate is phenomenally better again.

Q&A: minimum down payment

Goldilocks asks: “What is the lowest down payment I can do with FHA?”

Three and a half percent. That’s the floor on standard FHA guidelines, unless you look into down payment assistance — and that depends entirely on where you live: your state, your county, your city, which programs exist there and how they work.

There is a lot about down payment assistance that’s fabulous and a lot we don’t like. You keep your FHA first mortgage, and then you take a second loan, sometimes a third, to make up the down payment. The rate goes up when you use assistance. And you end up owing more on the house than you bought it for — upside down from day one. So I always tell clients: if there’s any way to get to the funds otherwise — retirement, a 401(k), a cash balance plan, deferred comp, anything — you’ll get a lower rate, a better monthly payment, you’ll qualify for more, and you won’t be upside down. The options are there; just understand them.

Q&A: gift funds and seller credits

Goldilocks also asks: “Can I use a gift from my parents for the down payment?”

You can. FHA allows a gift for the down payment — parents, a sister, an aunt or uncle, a fiancé. If you’re wondering about a particular person, just call and ask. Separately, FHA lets the seller credit you toward closing costs, and the cap is higher than most conventional products: many conventional loans stop around three percent, some go to six, but FHA always allows six.

Now, people do the arithmetic and think: it’s three and a half percent down, closing costs are about two percent, so if I ask the seller for six percent I come in with nothing. It doesn’t work that way. The borrower brings the three and a half percent of the sales price no matter what — it can be a gift, but it has to come from you.

So why ask for a big credit if closing costs are only about two percent? Because you can pay points to buy your interest rate down, and a lower rate means a lower payment, which means you qualify for more house. If you’re scraping together the down payment or receiving it as a gift, you don’t have another two percent lying around for points on top of your ten thousand dollars of closing costs on a $500,000 purchase — not with movers to pay and utilities to turn on and a refrigerator to fill. So when you write the offer, ask for about four percent: two to cover the standard fees, and two to buy the rate down. That’s the seller’s money making your payment affordable.

Q&A: HELOC rates

Hugo asks about home equity lines: “I have a 750 credit score and was told 10% interest. That doesn’t seem like a good deal — too high?”

You’re right, and it’s ten percent if not higher. A HELOC and an equity line of credit are the same thing; an equity loan is something different. The line is adjustable, and the payment is interest-only — if you make the minimum payment for ten years, what you borrowed on day one is what you owe on month 120. You can use it, pay it back, use it again, like a credit card tied to your house, and you owe nothing while the balance is zero.

Pull a recent credit card statement and look at your rate. I guarantee it’s significantly higher than two or three years ago, because the Federal Reserve keeps raising the prime rate, and equity lines are tied directly to prime exactly the way your credit cards are. Every increase pushes those rates and those minimum payments up, whether you opened the line today or two years ago. They’ve already said they plan to raise again — there’s probably another announcement before the end of March — so no, there’s no new HELOC product coming in cheaper.

Where a line still makes sense is as a safety net: you have to re-pipe the house unexpectedly, it’s five or six thousand dollars, you draw it, and then you pay more than the minimum to actually retire the balance. If you’re planning a fifty, sixty, a hundred thousand dollar renovation, these get very expensive and they’re going to get more expensive. That’s a call for us to look at a refinance against the line — or to tell you to sit tight. Give us what you owe, what the house is worth, your current rate and how much cash you need, and we’ll go through the options.

Wrap-up

If you don’t own a home yet, let’s get you pre-approved and ready. If you’re already looking and your lender hasn’t called to say you might qualify for more, call us. If you have a current FHA loan from around mid-2022 to today, your rate is probably similar to today’s but your mortgage insurance is not — and a streamline is genuinely simple: an application, a credit pull if we even need one, a verbal verification of employment, no pay stubs, no appraisal.

My next Home Buyer Workshop is Saturday, March 11th at 12 p.m. Pacific on YouTube — text WORKSHOP to 844-935-3634 for that link, which is separate from the weekly show link. To catch the show live and ask your questions in the chat, text MOM to the same number and you’ll get one link a week. Same number to reach the office. I’m Debbie Marcoux, the Mortgage Mom — back again next Wednesday.