NAHREP urges HUD to decrease FHA Mortgage Insurance Premium and end the life of loan provision

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November, 2022

Last month, NAHREP joined the National Housing Resource Center and other housing advocates signed a letter asking HUD to lower the FHA Mortgage Insurance Premium by 25 to 35 basis points and end the life of loan requirement on the FHA Mortgage Insurance Premiums. These changes would make FHA-insured mortgages more affordable for homebuyers at the point of sale and reduce monthly payments in the long term. As the U.S. is currently facing rising interest rates and record low housing affordability, now is a critical time to act on these initiatives.

Reducing the FHA Mortgage Insurance Premium

Generally, the Upfront Mortgage Insurance Premium (UFMIP) for all FHA-insured mortgages is 175 basis points or 1.75% of the base loan amount. Annual mortgage insurance premium rates vary by mortgage term, loan amount, and loan-to-value (LTV) ratio. By lowering premiums by 25 to 35 basis points, FHA-insured mortgages will more affordable. This would be particularly impactful for Latino families and other buyers of color who disproportionately rely on FHA financing to purchase a home. NAHREP’s State of Hispanic Homeownership Report highlights that Latinos are nearly twice likely to use FHA financing compared to the general population of homebuyers.

Rising price points have pushed homeownership out of reach for many first-time buyers across the country, but affordability is particularly challenging in Latino-dense markets. In 2021, homes saw a historic 15% average price appreciation nationally, and in November 2021, home price appreciation set a record for the highest 12-month growth since 1976. The states with the biggest jumps were Arizona (28.6%) and Florida (25.6%), home to a combined 12.7 percent of the Latino population. Reducing the FHA Mortgage Insurance Premium would be beneficial for the many Latino buyers already facing rising housing costs.

Ending the life of loan requirement for FHA Mortgage Premiums

NAHREP has long advocated for removing the life of loan policy, which requires most FHA borrowers to maintain mortgage insurance throughout their entire loan term. In 2017, NAHREP supported the Making FHA More Affordable Act, a bill introduced by Representative Maxine Waters, Chair of the U.S. House Financial Services Committee, that would have repealed the life of loan requirement and reinstate FHA previous policy of requiring borrowers to pay mortgage insurance premiums until the outstanding principal balance reaches 78% of the original home value.

Understandably, FHA’s life of loan policy was implemented in 2013 in response to the housing crisis when FHA’s Mutual Mortgage Insurance (MMI) Fund required a $1.7 billion bailout. However, since then, the fund has been on better footing, exceeding its Congressionally mandated targets. With FHA in a strong financing position, reversing this policy will allow lower down payment borrowers to build wealth, even in a higher interest rate environment where refinancing may not be possible.

Implications for Latino Homeowners

Considering that Latinos are likely to use FHA loan products, these reductions would likely expand homeownership opportunities for Latino homebuyers. Lowering the FHA Mortgage Insurance Premium would provide greater affordable loan options for Latino buyers who are already struggling to compete in a low-inventory housing market with rising interest rates. In addition, eliminating the life of loan requirement for FHA Mortgage Insurance Premiums would also make homeownership more affordable for low-income families. These changes, if adopted, could generate more wealth-building opportunities for families of color who have been historically excluded from homeownership.