The House last week approved legislation allowing FHA to increase the annual premiums borrowers are required to pay for mortgage insurance. The Senate has yet to consider the bill.
In April, FHA increased the premium paid at closing from 1.75 per to 2.25 percent of the cost of the loan. The increase in the annual premium, from .55 to 1.50 percent of the loan, will allow FHA to reduce the amount buyers will be required to pay at closing, but annual costs will increase. FHA accounts for about one-third of all purchase mortgages and half of all mortgages taken out by first time buyers.
The need for the increase in FHA mortgage insurance, already a lot steeper than conventional coverage, was announced in January by FHA Commissioner Dave Stevens but requires Congressional action to take effect. By contrast the mortgage insurance premium charged at closing on a conventional program is as low as .500% (with 10% down payment) with renewal rate in subsequent years as low as .300% in subsequent years.
Among the other steps FHA is taking to reduce risk and increase revenues are a reduction in the amount of closing costs sellers can pay from 6 to 3 percent of the loan, and heightened standards for credit scores. Borrowers with scores of 580 or less will have to put 10 percent down instead of 3.5 percent
The Congressional Budget Office estimated the change in the annual mortgage premium will bring more than $2.5 billion into FHA’s coffers in the next four years.
The mortgage insurance premium paid on an FHA loan is always significantly higher than on a conventional program. On an FHA loan the borrower will be charged a mortgage insurance premium equal to 1.50% of the purchase price of the property and a renewal premium of .500% in subsequent years.
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