Posted on 25 Feb 2011
Government-insured mortgages by the Federal Housing Administration (F.H.A.) will be getting slightly more expensive this spring.
The F.H.A. announced that it was increasing the annual mortgage insurance premium for borrowers by a quarter of a percentage point — to 1.1 or 1.15 percent of the loan amount for 30-year fixed-rate loans, and 0.25 or 0.50 for 15-year or shorter-term loans.
The higher premium applies to F.H.A. loans taken out on or after April 18.
The agency called the change a “marginal increase” that would be “affordable for almost all home buyers who would qualify for a new loan.” But industry experts say that some consumers, especially those considered marginal borrowers, may now be prevented from buying or refinancing a property.
The annual premium for 30-year loans was already changed in November, to 0.85 percent or 0.9 percent; the level used to be 0.50 percent or 0.55 percent. (The annual premium for 15-year or shorter-term loans, previously zero to 0.25 percent, did not change at that time.)
“It’s going to make fewer people qualify” for the loans, said Michael Moskowitz, the president of Equity Now in New York. “It’s the equivalent of a quarter-point increase in interest.”
The increase does not apply to F.H.A. loans already in place, or to F.H.A. reverse mortgages or home-equity conversion (HECM) loans.
According to the housing administration, the new rate structure would raise the cost of a $157,000 mortgage, a typical F.H.A. loan amount, by about $33 a month, or $396 a year. The agency requires that all borrowers of loans it insures pay the premium. Consumers with non-F.H.A. loans who put down less than 20 percent are typically required by their lenders to take out private mortgage insurance, to insure the lender against the risk of default.
F.H.A. loans are typically taken out by those who cannot qualify under the stiffer down-payment and credit-score requirements of Fannie Mae or Freddie Mac, the government-controlled buyers of most loans.
The housing agency requires at least 3.5 percent, while Fannie Mae typically requires 5 to 15 percent, or more. Last November, F.H.A. began requiring a minimum credit score of 500, and for credit scores below 580 — a level at which Fannie and Freddie do not back loans — a 10 percent down payment.
Last year, more than 19 percent of all residential mortgages, and more than 30 percent of all home purchases, were made with F.H.A. loans. In 2005, F.H.A. loans made up just over 4 percent of residential mortgages, and nearly 5.6 percent of home purchases.
Since the mortgage crisis began in 2008, “F.H.A. has been the only haven for borrowers,” said Sean Welsh, a senior loan officer at Campbell Financial Services in West Haven, Conn.
But the agency’s capital reserves have fallen below levels mandated by Congress, which is why the rise in the annual insurance premium was authorized.
Mr. Welsh said the increase, while “not too bad,” was still “additional pain” atop the November change.
F.H.A. loans used to be the province of niche lenders, but in recent years big banks have entered the market in a big way.
In fact, Wells Fargo recently lowered its minimum required credit score for an F.H.A. loan to 500 from 600. The bank also reduced its required debt-to-income ratio, or the amount of a borrower’s gross monthly income that can go toward paying off debt, to 43 percent. For lower-credit F.H.A. borrowers, the bank raised its minimum down payment to 10 percent.
“We don’t anticipate a significant impact on individual consumers from the mortgage insurance premium hike,” said Tom Goyda, a Wells Fargo spokesman. “F.H.A. is still an important source of funding for first-time home buyers and those who don’t have a lot for a down payment.”