FHA Mortgage Costs Rising

Why would HUD decide to raise FHA mortgage costs at a time when the economy and the housing sector nationally are struggling so much?  Just a few years ago, FHA home loans were considered a financing dinosaur.  FHA loans were nearly considered obsolete because they were time-consuming and more regulated, and sellers were usually not comfortable with FHA financing being written into the sales contract, because they knew at the time that the appraisal requirements and timeline for underwriting would drag out the process for closing the loan. Times have changed, and FHA has automated the FHA home loan process. 

Today, an FHA mortgage remains the only low down-payment lending product, requiring just 3.5% from borrowers. Just five years ago, FHA loans had a market share of only 5%.  In 2010, FHA lending accounts for about 30% of all home loan originations nationally. This surge of mortgage loan volumes has increased the pressure on the FHA Mortgage Insurance Fund. FHA is required to maintain this emergency fund of reserves above 2% based on all of its insured mortgages.  This year we saw the reserves fall well below the 2% minimum and HUD has been forced to take drastic steps, like tighten the FHA guidelines.

FHA Mortgage Lending Back in Style

In an effort to preserve the sacred FHA loan program, HUD announced it will be raising its annual mortgage insurance premium from 0.55 % of the mortgage amount to 0.90% (for loan to values higher than 95%) or 0.85% (for LTVs lower than 95 %). This insurance premium hike will go into effect, October 4th, 2010.  In an effort to save face, FHA will be lowering their upfront mortgage insurance to compensate homeowners for their rising monthly payments. This is good news for new homebuyers because the fees are dropped to 1% of the loan amount from 2.25%.  Overall, it looks to add $300 million a month to the insurance fund by taking these actions.

FHA Borrowers to Pay More Monthly

So what does that mean to FHA buyers come October? It means they will be paying more each month.  For example, let’s take a $250,000 purchase. Under the current FHA mortgage insurance framework, the upfront premium would be $5,428 for a total loan amount of $246,678. The monthly mortgage insurance would be $110.57. Take an interest rate of 4.625%, and the principal and interest payment would be $1,268.27. Add the $110.57 and you get $1,378.84.

Under the new FHA requirements, the new upfront amount would be about $2,500 on a FHA mortgage loan amount of $250,000. However, the monthly insurance jumps to $180.94. Take the same interest rate, and the principal and interest payment decreases to $1,252.76. But with the higher premium, that total payment comes in at $1,433.70, an increase of almost $55 a month.  To a borrower who is just barely qualifying, that can have an effect. It also puts into play taking another look at private mortgage insurance as an alternative for the borrower.  These types of adjustments shouldn’t be surprising as FHA tries to adjust to the marketplace. It recently released its quarterly report to Congress, and it shows just how much FHA has become a part of the mainstream when it comes to mortgage lending.

Tax Lien Issues with FHA Mortgage Loans

FYI- If the borrower is presently delinquent on any federal debt (IE VA-guaranteed mortgage. HUD insured FHA loan, federal student loan, Small Business Administration loan, delinquent federal taxes, etc) or has a lien, including taxes, placed against his or her property for a debt owed to the United States, the borrower is not eligible until the delinquent account is brought current, paid or otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing.

 

Tax liens may remain unpaid provided the lien holder subordinates the tax lien to the FHA insured mortgage loan. If any regular payments are made, they must be included in the qualifying ratios.  Since the IRS routinely takes a second mortgage position without the necessity of independent documentation, eligibility for FHA mortgage insurance will not be jeopardized by outstanding IRS tax liens remaining on the property unless the FHA mortgage lender has information that the IRS has demanded a first mortgage position.

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