New President Retracts MI Cut – How Will It Impact Reno Buyers?January 25, 2017

Within hours of his inauguration last Friday, President Trump signed an executive order suspending a planned mortgage insurance cut for FHA homebuyers.  If you’re looking into buying a home here in Northern Nevada and are unsure of how this affects you – let’s back up a few steps to the beginning.MI

First of all, what is FHA mortgage insurance?  Mortgage insurance is different than your home insurance that protects your house from a fire or other hazard.  Mortgage insurance protects the bank from you – essentially.  When a buyer puts less than 20% down on a property purchase, the bank views them as a bit more of risk.  They think that if your finances go south, you’re more likely to walk away from your home because you have less “skin in the game” if you will.  So the bank requires that this buyer pay monthly mortgage insurance as part of their mortgage.  This insurance covers the bank in case of a default (the buyer stops making their payments).

FHA mortgage insurance is a bit unique in that it is issued by the Federal Housing Administration which is a government agency.  It is also permanent for the life of the loan – whereas private mortgage insurance falls off when the homeowner has 20% equity in their home.  Buyers can qualify for an FHA loan a little easier, with credit scores below 600 even.

Former President Obama’s administration had evaluated FHA’s fund for insuring these loans and determined it had more than enough reserves to meet future claims.  So rather than building the fund to an excess, former HUD Secretary Julian Castro announced that they would lower the cost of mortgage insurance in order to “pass along some modest savings to working families.”  The change would be effective January 27th.  Many prospective buyers looked into qualifying for a loan, since the monthly expense would be lower.  Some current homeowners applied for a refinance to save some money on their mortgage insurance.  It wasn’t a huge cut, just 20 basis points, but for those who were borderline in terms of qualifying to purchase or refinance – it made a difference.

Since the cut has been suspended indefinitely, unfortunately those pre-approvals and refinance applications may have to be voided.  (If the buyer doesn’t qualify based on the old mortgage insurance premium.)  The good news is that since it hadn’t gone into effect, no one will be blindly subject to a higher premium than they were expecting – loans had not yet closed under the new premium.  If you were looking into a pre-approval for an FHA loan in recent weeks or investigating a refinance of your current FHA loan, be sure to circle back with your mortgage adviser about the new projected monthly payment.  If you were applying for a conventional loan, this news doesn’t impact you.