Government loan program just got a little more expensive.
Created by President Franklin Roosevelt at a time when 2 million construction workers were out of work and housing prices had collapsed, the FHA loan was designed to provide affordable home ownership options to under served American families and to keep our mortgage markets afloat during “tough times”.
Certainly most would agree that we have witnessed some “tough times” over the past 15 months. We were informed of job losses that surpassed 700,000 per month, housing prices were in a free-fall, residential investments dropped 40% and the credit markets were frozen solid. In fact, many respected economists warned of a second Great Depression, sparked of course by a crisis in the housing market. Thankfully, the tides of doom and gloom are retreating and the markets are returning to normalcy.
Fast forward to today, 5 April 2010, as the new Up Front Mortgage Insurance Premium (UFMIP) is raised from 1.75% to 2.25% on all FHA product types (Purchases, conventional to FHA refinances, and FHA to FHA streamline refinances). This up front funding fee is coupled with an annual fee to raise the capital reserves needed to protect the taxpayers from a run of delinquent loans. This is government mortgage insurance similar to private mortgage insurance the conventional loans may require. To illustrate how this works, consider the following example:
A $300,000 FHA purchase would require a one time (2.25%) or $6750.00 up front fee and a monthly fee of $137.50 for 5 years. Contrast with a VA loan with a one time (2.15%) or $6450 funding fee and no monthly fee.
Again, these fees serve as insurance, should the borrower default, and are mandatory. Another interesting fact is that congress provided the FHA the flexibility to increase the UFMIP to 3.00% if deemed necessary, with the passage of the Housing and Economic Recovery Act (HERA) of 2008.
The guidelines representing credit score and down payment are also in discussion. The FHA is proposing a two-step FICO floor for FHA purchase borrowers. Those borrowers with a FICO score of 580 and above would be required to make the current 3.5% minimum down payment. The less fortunate borrowers with a FICO score ranging from 500 – 579 would be required to make a minimum down payment of 10%. Applicants below 500 are simply ineligible. The administrators emphasize the data that reflects a delinquency rate 4 times higher when loan are originated below these proposed guidelines.
The FHA loan program has helped millions of American families attain the ranks of home owners. It provides for first time home purchasers with small down payments, provides for borrowers with small correctable credit issues, and encourages institutional lending when times are tough. The FHA loan is indeed a valuable tool, however, the price just got a little more expensive.