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, it’s 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.