A FHA loan is insured by the federal government and it is the most popular mortgage for homebuyers who do not have a lot of cash to put towards a down payment.Individuals can can qualify for a FHA loan with only 3.5% down, making home ownership a possibility for millions of people who could never save up the 5%, 20% or larger down payment required with traditional loans.
But FHA loans are beginning to become less affordable because of underwriting changes and a series of fee increases in recent months. Here are some of the changes you can expect with FHA loans in the upcoming months.
April 1, 2013: The annual mortgage insurance premiums are going to increase by a tenth of a percentage point. This may not seem like a lot, but on couple of hundred thousand dollar loan it becomes significant. This will also be the third increase on these premiums since 2011 and the costs are passed on to borrowers.
June 3, 2013: The FHA will require manual underwriting for borrowers who have a debt-to-income ratio of at least 43% in their household along with a credit score below 620. There will also be a required down payment of 5% for FHA-based loans that exceed $625,500 in some of the areas with higher costs, such as Washington, D.C., California and other expensive locations.
Another change going into effect on June 3 is that the FHA will no longer cancel mortgage insurance premium charges for balances that are less than 78% of the original loan amount. This essentially means that borrowers who have a FHA mortgage will pay insurance premiums throughout the term of the loan. With traditional mortgages, borrowers can have their insurance premium payments cancelled once their loan amount is 78% of the original loan amount.
According to an article in the LA Times, there are many critics of the new fees and changes taking place with FHA mortgages. Dennis C. Smith, a co-owner of Stratis Financial Corp. in Huntington Beach, wonders if the FHA “is putting itself out of business with the moves they’ve made in the past couple of years.” Steve Stamets with Apex Home Loans in Rockville, MD, says the new fees and changes are “just a money grab” that will drive first-time home buyers away from FHA mortgages. He says that many creditworthy buyers are already paying more for a FHA mortgage than with a conventional mortgage just because they can’t come up with a sizable down payment for a home.
According to top officials with the FHA, however, the agency’s priority isn’t about increasing its market share. The main priority of the FHA is to protect its insurance fund and cut its losses. Whether or not the new changes are going to help make that happen remains to be seen.
If you are in the market for a FHA loan, make sure your broker or loan officer crunches the numbers for you to compare the costs. Without the option to cancel your mortgage insurance premium payments and paying the increasing fees, you could be better off choosing one of the privately insured conventional mortgage alternatives instead.