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FHA smacks buyers with fee hike

By Polyana da Costa · Bankrate.com
Thursday, January 31, 2013
Posted: 3 pm ET

Mortgages for homebuyers with low down payments are about to become more expensive -- again. And this time, borrowers will get stuck with the higher fee for the life of their loans.

The Federal Housing Administration has announced several changes to FHA loans, including increasing the mortgage insurance premium fee that is added to the borrower's monthly mortgage payments. The FHA will also tighten the requirements for borrowers with low credit scores and will propose raising the down payment on larger loans.

What changes for mortgage insurance

Starting June 3, borrowers who take out new mortgages will have to pay for mortgage insurance for the life of their loans. Under the current rule, the FHA has to stop charging the borrower for mortgage insurance when the loan reaches 78 percent of the original loan amount.

The higher fee goes into effect on April 1. The other changes will be issued in "coming days," according to an FHA statement.

The annual mortgage insurance premium on most new FHA mortgages will increase by 0.1 percent to 1.35 percent of the balance of the loan. A borrower with a $200,000 FHA mortgage pays about $2,500 per year, or $208 per month,  in mortgage insurance. After the increase, the same borrower would pay $2,700 a year, or about $225 per month. In 2008, before a series of increases that the FHA implemented over the years, that borrower would have been required to pay only $91 per month, totaling $1,100 a year.

The changes are "essential and appropriate measures to manage and protect FHA's single-family insurance programs" says FHA Commissioner Carol Galante.

For now, it's unlikely the small increase will affect a borrower's ability to buy a home or refinance, says Rob Nunziata, president of FBC Mortgage in Orlando, Fla. But once mortgage rates rise, FHA loans might simply become too expensive for some borrowers, he says.

"Once rates start to go up, its going to become a problem and it's going to make borrowers think twice about going with FHA ... and it's going to affect their purchasing power," Nunziata says.

Low FICO scores

Borrowers will have to jump through additional hoops to get an FHA mortgage when their credit scores are lower than 620 and their debt obligations represent more than 43 percent of their income.

"Lenders are already very hesitant to lend to borrowers with scores under 620," Nunziata says. Generally, they make exceptions if the borrower can compensate for the low score by showing a savings account with enough money to pay for at least four months' worth of mortgage payments. It's also helpful when the mortgage payment will be significantly less than what the buyer pays in rent.

Large loans, bigger down payments

The FHA will propose increasing the minimum-required down payment from 3.5 percent to 5 percent for loans of more than $625,5000. The large FHA loans are available in high-cost areas.

If you want me to keep you posted, follow me on Twitter @Polyanad.

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27 Comments
Terry
February 01, 2013 at 7:30 am

This ain't the Banks you get your loan thru, it's our Federal Gov't that insures the loan. Banks charge interest on loans to make money, Gov't charges you for protecting the loan of the money you barrowed from the Bank.

Jean
February 01, 2013 at 6:59 am

The banks aren't sticking it to anyone. The government is protecting the taxpayer. These individuals are given an opportunity to buy homes thanks to the taxpayers. The taxpayers have been put on the hook enough for foreclosed properties that individuals should never have bought. The market is the market. If there are more rentals, then that is what it is. One man's loss is another man's gain.

Tom
February 01, 2013 at 6:59 am

How come the people with the lowest incomes and the most hardship to pay (% of monthly income to Mortgage) have to pay the highest interest rates and the most insurance, making it that much more likely that they will fail while helping a warbler throated banking baron laugh in his greed for earthly possessions?

Why not have 1% loans and no insurance on homes under 100K and 1.5% loans on homes up to 150K and so on up to 2.5% for a home home on a 250K house? How much profit is enough for a bank? The system in place now has limits for borrowers and penalties for the poor. Why not cap the profit? Does my bank really need to drive thousands of families into poverty? Couldn't the bankers be happy being very rich instead of super filthy uber rich with thousands at the windows begging for food?

Tom
February 01, 2013 at 6:56 am

How come the people with the lowest incomes and the most hardship to pay (% of monthly income to Mortgage) have to pay the highest interest rates and the most insurance, making it that much more likely that they will fail while helping a warbler throated banking baron laugh in his greed for earthly possesions?

Why not have 1% loans and no insurance on homes under 100K and 1.5% loans on homes up to 150K and so on up to 2.5% for a home home on a 250K house? How much profit is enough for a bank? The system in place now has limits for borrowers and penalties for teh poor. Why not cap the profit? Does my bank really need to drive thousands of families into poverty? Couldn't the bankers be happy being very rich instead of super filthy uber rich with thousands at the windows begging for food?

eddie
February 01, 2013 at 6:48 am

the mortgage insurance should be returned to the buyer when they sell their house or finally paid off.

Sharon
February 01, 2013 at 4:00 am

I don't think all the raised fees for FHA should apply to states that are already in a big down market such as Florida, Arizona and Nevada, these states should be exempt for the raised fees as they are having a hard time selling them now. A lot of people are out of work in these areas and need lower payments NOT higher payments. I think this is very bad move for FHA in a down housing market as it will lead to less loans. Speaking as a previous Realtor.

chris
February 01, 2013 at 3:17 am

The housing market is allready being eating up by big money investers and turning this country into a renal market. Whats this do for the future of our counry and our childern.

jakski
February 01, 2013 at 3:09 am

hah,the American dream,,George Carlin was right when he said,Thats why they call it The American Dream,you have to be asleep to dream it ..The United States used to be a roll model

matt
February 01, 2013 at 2:04 am

No - these low cost loans were one of the reasons for the housing bubble burst, in addition to the thousands of foreclosures.

And the banks are not sticking it to the public, they are protecting their money. If you don't want to pay mortgage insurance, be more responsible with your money/credit and use a higher down payment.

lorenzo moreno
February 01, 2013 at 1:48 am

This is the reason that the housing market is what it is. The banks keep sticking it to the public, the dream of home ownership is slipping away just like everything else is.