F.H.A. Rule Changes for Mortgage Borrowers (NY Times)

Prior results do not guarantee a similar outcome.

Two significant rule changes went into effect this month for mortgages insured by the Federal Housing Administration, "F.H.A." which is part of the Department of Housing and Urban Development, will make it more costly and difficult for home buyers who fail to qualify for conventional mortgages. These changes are a result from President Obama signing into law a bill authorizing the F.H.A. to increase premiums to shore up its insurance funds. Furthermore, the agency had been authorized to raise the annual premium to as much as 1.55 percent.

F.H.A. loans are usually taken out by buyers who fail to qualify under the more rigid down-payment requirements of Fannie Mae or Freddie Mac, the government-controlled buyers of loans. F.H.A. requires 3.5 percent down payment, while Fannie Mae or Freddie Mac typically requires 5 to 15 percent down payment and sometimes more, depending on the type of loan.

The first rule change raises the annual insurance premium paid monthly by the borrower. Depending on the borrowers down payment the old rate was 0.5 percent to 0.55 percent of the loan balance. Under the new rules the insurance premium will rise to 0.85 percent to 0.9 percent of the loan balance. The borrower will continue to pay the monthly insurance for five years or until their loan-to-value ratio reaches 78 percent, at which point they have 22 percent equity in their home. The second rule change reduces the one-time insurance premium borrowers must pay at closing, to 1 percent of the loan balance from the current level of 2.25 percent. The borrower has the option to pay this upfront premium at closing or add the premium to the loan balance, which is paid over the life of the loan in addition to the interest and principal. At first blush, the lowering of the upfront premium seems to be welcomed news to borrowers but in reality it does little to offset the new insurance premium monthly increase.

The following example has been provided by the F.H.A. to demonstrate these new rule changes. A borrower making approximately, $54,000.00 per year and who puts 3.5 percent down on a $154,000 house with a 30-year fixed-rate mortgage at 5 percent and also finances the upfront premium into the loan will see monthly mortgage payments, including taxes, interest and the two insurance premiums, rise to $1,238 from $1,205. This example is based on median data, including property taxes put at about 2.5 percent of home value. That increase includes the drop in the upfront mortgage insurance, to $1,486 from $3,344 - but also includes the rise in the monthly insurance premium, to $111 from $68.

By contrast, conventional loans, which conform to Fannie Mae and Freddie Mac underwriting guidelines, do not require upfront mortgage insurance. However, the loans require monthly private mortgage insurance, if the borrower puts less than 20 percent down toward the purchase, or has less than 20 percent equity upon refinancing.

Besides these two new rule changes, the F.H.A. for the first time set a minimum FICO score of 500 for borrowers who want an F.H.A.-insured loan. It also introduced a new minimum down payment of 10 percent for borrowers with FICO scores below 580. Those borrowers with a FICO score above 580 still pay a minimum 3.5 percent.