The Federal Housing Administration has decided to increase the premiums they charge for insuring mortgage home loans. Since the sub-prime fallout the FHA has been taken on more and more home loans. To cover their increased risk the FHA is increasing the premium charged upfront on loans from 1.5% to 1.75% of the loan amount.
Briefly, from July 14th to October 1st when the new loan premium amount goes into effect, the FHA determined the amount charged for premiums using a "risk-based" system. The "risk based" pricing system determined the premium amount based on borrowers credit scores and the amount either paid down on the house at closing or, in the case of refinance, the amount of equity in the home. In July Congress approved a bill that allowed the FHA to use the short-lived "risk based" system.
But what does this mean for the average borrower? It means on a loan of $300,000 the required upfront premium on the loan will be $5,250 instead of the $4,500 it would have been a few short months ago. It is important to note that the annual premium paid by borrowers in not changing and would remain at about 0.50% on a loan like the one in the sample above.
Investors have been shying away from buying mortgage securities not backed by a federal agency or government sponsored investors Freddie Mac and Fannie Mae. This has seen the FHA taking on a larger share of the housing market, potentially as much as 30% by the end of this year. Since Freddie and Fannie are becoming more cautious about guaranteeing mortgages due to depleted capital from heavy losses, the FHA is forced to increase their premium rates.
The FHA is still the best option around as far as getting a loan or refinancing a mortgage. Borrowers can receive lower interest rates and can make down payments as small as 3% of the loan amount. Also, the relaxed credit requirements make it a viable option for with poor credit or low-to-moderate income.