Tuesday, Feb. 2
Written 9:15 a.m. EST
PROPOSED FHA CHANGES: The president's budget proposal calls for FHA-insured mortgages to be cheaper upfront but more expensive month-to-month. So it'll be a little easier to get a house and a little harder to keep it.
The Federal Housing Administration insures mortgages. The borrower pays for the insurance, and the lender collects a claim from the FHA if the borrower goes into default.
When you get an FHA-insured loan, you pay the insurance premium in two parts: the upfront premium and the annual premium. The upfront premium is a fee of 1.75 percent of the loan amount. This spring, that's going up to 2.25 percent of the loan amount. So if you're borrowing $100,000, the upfront premium right now is $1,750, soon to rise to $2,250.
The annual premium varies. If you make a down payment of 5 percent or more, the annual premium is 0.5 percent. You pay it monthly. On a $100,000 loan, the annual premium comes out to $500 a year, or $41.67 a month. (If the down payment is less than 5 percent, the annual premium is a little more -- 0.55 percent.)
The FHA wants to make the load lighter upfront and heavier in back. In the fiscal 2011 budget, the Obama administration proposes reducing the upfront premium to 1 percent, and increasing the annual premium to 0.85 percent (or 0.9 percent for those making down payments of less than 5 percent).
Let's take the example of someone who gets a $100,000 loan after making a down payment of 6 percent. The upfront premium would be $1,000. The annual premium would be $850, or $70.83 a month.
Now let's look at the cost difference over five years. Today, if you borrow $100,000 after putting 6 percent down, you would pay $1,750 upfront and $500 a year. Over five years, that totals $4,250 for FHA insurance.
Under the Obama administration's proposal, on the same loan you would pay $1,000 upfront and $850 a year. Over five years, that totals $5,250. That's $1,000 more than you currently would pay over the first five years.
The FHA is raising prices because it is paying out more in claims than it's taking in on premiums. When my town was hit by three hurricanes in 13 months back in 2004 and 2005, our homeowner insurance premiums skyrocketed because the insurance companies needed to rebuild their capital reserves. The FHA is doing the same thing. The difference is that the FHA is recovering from a financial calamity and not a natural one.
If you can handle it, you can find this part of the budget proposal in this "Special Topics" budget document in the "Analytical Perspectives" section. Page 346.