FHA loan costs to increase

Toy house sitting on a pile of money, with the American flag in the background
  • The upfront increase will mean an extra $500 per $100,000 borrowed.
  • Congress must still OK an increase in the annual premium.
  • Premiums are going up to offset FHA losses on the housing market.

It will cost more money to get an FHA loan in 2010.

The Federal Housing Administration will raise prices. The increase will amount to an extra $500 for every $100,000 borrowed. It's bad news for the 30 percent of borrowers who get FHA-insured mortgages. The FHA loan is popular because its minimum down payment is 3.5 percent, whereas most conventional loans require a down payment of at least 10 percent.

The FHA isn't a lender. Instead, it insures mortgages. If you get an FHA-insured mortgage and then default on it, the FHA reimburses the lender for financial losses. As the borrower, you pay for the insurance, even though the lender is the beneficiary. You pay for FHA insurance in two pieces: an upfront premium and an annual premium. The FHA will raise the upfront premium this spring, and will ask Congress for permission to raise the annual premium later.

The upfront premium is a lump sum paid at closing. Right now, it's 1.75 percent of the loan amount. The FHA will raise the upfront premium to 2.25 percent this spring -- the maximum it may go by law. On a $100,000 home loan, the upfront premium will rise from the current $1,750 to $2,250.

The pain of that increase is mitigated by the fact that the borrower can roll the upfront premium into the loan. For example, someone getting a $100,000 mortgage could add the upfront premium to the loan and borrow $102,250.

The annual premium varies, depending on the size of the down payment (or, in a refinance, the amount of equity). For borrowers with a down payment or equity of less than 5 percent, the annual premium is 0.55 percent of the loan amount. That's $550 per year for each $100,000 borrowed, which comes out to $45.83 per month.

For people with down payments or equity of 5 percent or more, the annual premium is 0.5 percent of the loan amount. That's $500 per year for each $100,000 borrowed, or $41.67 per month.

The head of the FHA, David Stevens, said he will ask Congress for permission to raise the annual premiums. "When we receive legislative approval, the upfront annual premium structure will be adjusted, with some of the upfront premium shifted to the annual premium," he said in a speech, implying that the upfront premium won't be rolled all the way back, but only part of the way back, perhaps to 2 percent.

More rain than money saved

Like all insurers, the FHA saved money for a rainy day -- in the FHA's case, it set aside money for a downturn in the economy resulting in many foreclosures. But the FHA probably didn't save enough, and its loan loss reserves are dwindling. Stevens says: "The changes will insure the long-term viability of the program and increase FHA's capital reserves. They will require more skin in the game from borrowers."

The FHA is making some other changes that directly affect borrowers. The agency will restrict the amount of money that sellers can contribute to buyers' closing costs. Right now, the seller can kick in the equivalent of 6 percent of the home's price toward paying the borrower's closing costs. The FHA will reduce the lender's maximum allowed contribution to 3 percent. This change will reduce the incentive to artificially inflate home values, Stevens says.

And the agency will require a credit score of at least 580 to qualify for the FHA's 3.5 percent down payment program. A borrower with a lower credit score would have to come up with a down payment of at least 10 percent. This change won't have much effect, because most lenders require a credit score of 620 or 640 for FHA borrowers, anyway.

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