If you are in the process of buying a short sale and qualify for an FHA loan for the mortgage, you should act quickly to seal the deal. The loan application process itself may not take too long, but short sale negotiations may tend to drag on. That’s all the more reason to get started right away and make sure the seller has already gotten preapproval from their lender. If you wait until June to get your loan, you will be facing a dramatic increase in the cost of your FHA loan over the lifetime of the mortgage. This change has nothing to do with interest rates. Instead, you’ll be seeing the increase occur in the mortgage insurance premium (MIP) and the length of time the insurance remains in effect.
Times Are Hard for Mortgage Companies
Previously, buying a home with a substantial down payment and choosing a short loan term was enough to exempt you from having to pay mortgage insurance premiums on an FHA loan. Even if you did have to pay MIPs at first, these charges automatically stopped once your outstanding loan balance reached 78 percent of the value of the property. Going forward, many new borrowers are going to be stuck paying insurance for the entire life of their loan.
The current number of foreclosures and short sales may be one factor that prompted this change. The FHA is certainly eating a lot of costs from people defaulting on their loans even after paying down a substantial amount over many years. It’s come to the point where even a couple of decades of on time payments don’t mean the risk of default is gone. Financial hardship is hitting more and more responsible homeowners, making them unable to meet their mortgage obligations.
What Are the New MIP Rules?
For all mortgages (even 15 year mortgages) with 90 percent loan to value (LTV) ratio, the MIP will be assessed for at least the first 11 years. For mortgages with a greater than 90 percent LTV, the MIP may continue a full 30 years. The basis points used to calculate the actual cost of premiums is also going up five to ten points depending on the LTV ratio. This means making extra payments against the principle on your loan and getting it paid off as fast as possible is going to be even more of a money saving move than ever.