by Amy Avery, Director of Compliance
With the ongoing changes in the mortgage industry, and fewer options for borrowers, more lenders are turning to FHA loans to increase their business. Questions concerning the FHA Annual Mortgage Insurance Premium calculation are common.
For Conventional loans, the monthly PMI amount is easy to calculate. The loan amount is multiplied by the initial PMI rate percent, and then divided by 12 to get the monthly payment. Investors such as GMAC have cracked down on FHA loans where the Conventional PMI calculation has been used instead of the actual FHA MIP calculation required by 24 CFR §203.260-203.261. They will no longer purchase loans with Federal Truth-in-Lending Disclosure Statement payment streams that do not use the accurate Annual MIP calculation.
Some underwriters still utilize the shorthand calculation, and the resulting value has been labeled by HUD as “Estimated Annual MIP Amount” on one of the FHA Connection MIP Calculator Results screens. This is done so lenders will know it is not the official calculation of the periodic MIP. HUD’s actual FHA Annual MIP calculation is more involved. The Annual MIP is calculated for each year by taking the average of the 12 balances for that year (without the Upfront MIP amount) and multiplying it by the applicable rate percent (currently 0.55%, 0.50%, or 0.25%). This amount is then divided by 12 for the monthly MIP payment.
Since a different “Annual Average Outstanding Balance” is calculated for each year of MIP, the TIL payment schedule contains a series of 12 payments at each MIP amount, even for Fixed Rate loans. Although the payment schedule on the TIL will still reflect potential rate changes for Adjustable Rate loans, the initial interest rate is used to calculate the Annual Average Outstanding Balance for each year. The official Monthly MIP schedule using the Annual Average Outstanding Balance can be accessed in FHA Connection under Single Family Servicing -> Mortgage Calculator.
The Annual MIP drops off once the loan reaches 78% LTV, and again the Upfront MIP amount is left out for this calculation. A minimum of five years of MIP must be paid on loans with terms over 15 years before the MIP payments are no longer required (see FHA Handbook 4155.2 7.3.c for details concerning Annual MIP cancellation).
A common question is what property value to use in the LTV calculation for FHA Streamline Refinances when a new appraisal is not required. The LTV on those loans is based on data in FHA’s Single Family Insurance System (SFIS) for the mortgage being refinanced. The new loan amount, excluding the Upfront MIP, is divided by the lower of the sales price or appraised value amount contained in SFIS. If a computed loan-to-value ratio is not possible, due to missing data or previous refinancing without an appraisal, the new LTV will default to 89.99%.
Earlier this year the Federal Housing Administration increased the UFMIP rate to 2.25% for most loan types. New regulations have been added to increase the net worth requirements of FHA-approved lenders, strengthen lender approval criteria, and make lenders liable for the oversight of mortgage brokers. Additional changes to mortgage insurance premiums and policies to ensure FHA’s long term financial soundness are likely to be forthcoming.