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FHA is increasing the upfront insurance premium for buyers. Housing and Urban Development (HUD) has announced that Upfront Mortgage Insurance Premiums are increasing for FHA loans. The new ruling takes effect April 5th, 2010 for all new loan applications. Any loans already in process will not be affected.
In order for a buyer to be able to purchase a home or condominium with as little as 3.5% down payment, the U.S. government, through the FHA program, insures the lender in the case of foreclosure. The cost of this insurance is passed along to the buyer in two ways.
- 1) Upfront Mortgage Insurance-the amount added to the initial loan amount.
- 2) Monthly Mortgage Insurance-an additional monthly payment in addition to the mortgage payment, taxes and insurance.
The current cost of the upfront premium is 1.75% of the loan amount. The new upfront amount will be 2.25% of the loan amount. If a borrower is applying for an FHA loan in the amount of $729,750 the current cost is $12,770. As of April 5th the new cost will be $16,419. On a $300,000 loan the cost currently is $5,250 but will soon be $6,750. This is all will effect the buyers that only qualify thru FHA and because they are increasing the upfront insurance premiums.
In the majority of cases the borrower finances the premium into the loan over the 30 year period. It may be paid at closing by either the buyer or the seller to avoid having to finance it into the loan. When the loan is paid off FHA will keep the balance of proceeds. The Monthly Mortgage Insurance is required to be paid for the greater of 5 years or until the loan to value reaches 78%.
The Monthly Mortgage Insurance cost to buyers currently will remain the same for now. There have been discussions about FHA increasing the down payment requirement from 3.5% or increasing the Monthly Mortgage Insurance payment but neither have been approved as of yet. The belief by HUD is the extra amount added to the loan upfront is less of an obstacle for the home buyer as opposed to more money down or a higher monthly insurance payment. HUD recognizes the need to keep the housing industry productive while at the same time taking steps to offset the losses they are accumulating.
Now that FHA is increasing the upfront insurance premium for buyers and possibly increasing the amount of the down payment sales will drop off. There would need to be another place for the potential buyers to go and that does not exist.
