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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
Joe
February 01, 2013 at 11:02 am

Since I am paying for the insurance, it is my choice whether or not to use it if I have to.

Rick Giffin
February 01, 2013 at 10:53 am

when you are paying for your mortgage insurance it should pay the bank off on your loan. once you default and lose you home you are out of the picture you have lose your home. The bank collects the insurance . Mortgage insurance is not life insurance. That is a policy that the insured owns. not the banks or anyone else.

raul
February 01, 2013 at 10:18 am

Banks make money, on both ends, Bank get the FHA Guarantee Backing. ( Paid by the home owner and tax payer), The Bank then keeps the House by pulling the Homes from the auction then banks once again resale and makes money from resale. It's a win win. If we are trying to house people into homes for the better then why doesn't FHA work with the owner to resale house and get back on his or her feet. Government stupidity.

Al
February 01, 2013 at 10:04 am

This is backwards. The ins. should pay my mortgage in case I loss my job. If the lender wants insured that I won't default they should pay that.... so the American dream keeps getting flushed down the toilet.

chuck
February 01, 2013 at 9:58 am

What people don't realize is without mortgage insurance, we would
revert back to the days when you needed 20% down to purchase any
home. That would mean on a $200,000 purchase, the buyer would need
a $40,000 down payment. Many people would not be able to buy a
home. It is a small price to pay.

Debbi
February 01, 2013 at 9:48 am

Mortgage insurance is to build up a fund to cover those who default on their mortgage loan. Life insurance has nothing to do with paying off a mortgage if you default on a loan.

John
February 01, 2013 at 9:24 am

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."

Eddie, do you get a refund on your car insurance if you don't have an accident ? Insurance is something you buy, but hope you never have to use.

gpa
February 01, 2013 at 9:20 am

i am a first time home buyer, instead of paying for mortgage insurance . i would better off buying life insurance since I'm still in good health

Dee
February 01, 2013 at 9:12 am

This is part of the reason why my husband and I took money from our 401K to purchase our home for cash...I would rather pay the small tax penalty on the 401k than to be burden with a montly mortgage payment...instead we are taking what would have been our mortgage payment to rebuild our 401k. I stop using credit years ago, if we can't pay cash we dont buy.

LadySmith
February 01, 2013 at 7:50 am

All this means is more homes going into foreclosure. Exactly who can afford this type of insurance to begin with a month on top of the mortgage, taxes and homes owner's insurance. Personally I don't understand why if you buy a house for say $100,000 by the time you pay the loan off the mortgage company makes over $200,000 in interest.

But then again I'll keep my paid off home even though it is very old and small. To pay $200,000 and up for a home, is utterly dumb on the part of purchasers. Life is more than a mortgage payment and how people can afford a house note of $1500 a month or more, I just don't get it.