Nearly all home buyers who use an FHA loan in Washington State have to pay mortgage insurance premiums. Those premiums are required by the Federal Housing Administration and help to sustain the agency’s capital reserves.
There was some talk over the past few months that HUD might reduce the FHA mortgage insurance premium, thus saving borrowers money going forward. But we now have confirmation that such a reduction probably won’t happen anytime soon.
Catching Up on FHA Mortgage Insurance
Federal Housing Administration (FHA) loans are a popular option among home buyers in Washington State and nationwide. They’re particularly popular among first-time buyers with limited funds in the bank, since they allow for a low down payment of 3.5%.
Borrowers who use an FHA loan to buy a home in Washington usually have to pay for mortgage insurance. There are two of these premiums:
- There’s an upfront premium that equals 1.75% of the base loan amount. It can be rolled into the monthly payments, in most cases.
- There’s also an annual premium that comes to 0.85% for most borrowers (though it can vary based on the loan parameters).
The annual premium was slated to be reduced a couple of years ago, during President Obama’s time in office. But that reduction was cancelled by President Trump, shortly after he took office in 2017.
Since then, there has been a lot of hopeful discussion (and even some lobbying) about the FHA reducing their mortgage insurance premiums. HUD officials released a report to congress on November 15 that said, “The financial health of FHA’s single-family insurance fund is sound.”
‘Thin Margin’ Preventing a Reduction in Premiums
So why not reduce the FHA mortgage insurance premiums, as was previously planned.
FHA Commissioner Brian Montgomery fielded this same question during a November 2018 call with reporters. As first reported by HousingWire, Mr. Montgomery explained:
“We do have to be realistic about the fact that that is still a relatively thin margin. While the MMI Fund is sound at this point in time, I think we’re still far away from being in a position to consider any reduction in our mortgage insurance premiums.”
The “thin margin” mentioned above is the difference between the congressionally mandated capital reserves, and the actual reserves in the fund. Those reserves are used to cover insurance claims relating to FHA loans.
So it seems that FHA mortgage insurance premiums for Washington home buyers will be the same in 2019 as they are right now. No reductions are on the horizon — at least not for a while.
With Conventional Loans, PMI Can Be Canceled
With the exception of VA loans, borrowers who make small down payments usually have to pay for mortgage insurance. This is true for the FHA program, and also for conventional mortgages with a loan-to-value ratio above 80%.
But there’s an important difference between these two financing options. Most home buyers in Washington who use the FHA program have to pay their annual mortgage insurance premiums for the “life” of the loan. In contrast, those who use conventional home loans (that are not government insured) can typically cancel their mortgage insurance when they reach a certain level of equity.
Additionally, borrowers who use a conventional loan with a down payment of at least 20% can avoid this insurance entirely. A down payment of that size isn’t always required, but it does have some advantages. This is why some home buyers choose to put down 20% or more. (Here are some other strategies for avoiding PMI.)
Have mortgage questions? You have a lot of options when it comes to shopping for a home loan. We can help you choose the best financing path for your unique situation. Please contact us with your mortgage-related questions.