Housing and Urban Development (HUD) Secretary Julian Castro announced on Monday that the Federal Housing Administration (FHA) will reduce annual insurance premiums by 25 basis points. The move affects most new mortgages with a closing or disbursement date on or after 1/27. The HUD expects these new rates to save FHA insured homeowners an average of $500 this year.
The reductions can be made because the FHA Mutual Mortgage Insurance Fund has gained $44 billion in value since 2012.
"After four straight years of growth and with sufficient reserves on hand to meet future claims, it's time for FHA to pass along some modest savings to working families," said Castro.
"This is a fiscally responsible measure to price our mortgage insurance in a way that protects our insurance fund while preserving the dream of homeownership for credit-qualified borrowers."
This is not be the first time that the FHA has altered mortgage premiums. At the beginning of 2015, the agency lowered insurance premiums from 1.35 percent to .85 percent, which resulted in nearly 330,000 new loans, according to The Mortgage Reports. More than 1.25 million people applied for FHA loans in 2016, according to the HUD’s annual report for 2016.
FHA loans are different from traditional loans because the federal government will cover any losses a lender incurs from an FHA-backed loan. This improves the likelihood that lenders will approve applicants for mortgages who might not otherwise be able to get a loan. The tradeoff is that mortgage insurance premiums add an extra amount to a borrower's monthly mortgage payment - approximately $70 for every $100,000 borrowed, according to The Mortgage Reports.
FHA loans are helpful to applicants with lower credit scores because any applicant with a credit score of 580 or higher is eligible. Traditional loans often have a much higher credit score threshold, which bars some people from getting approval for a mortgage.