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FHA Doing as Much With as Little Damage as Possible

On April 5th, FHA mortgage insurance premiums increased.  The increase is a full half percentage point, from 1.75% to 2.25%.  This is a $500 upfront increase for every $100,000 borrowed.  For a buyer borrowing $300,000, this means an upfront mortgage insurance premium of $6750, instead of the $5250 previously charged.  The good news is that this premium can be rolled into the loan to spread out the pain.

The large financial losses being absorbed by the FHA during these trying home price and mortgage troubles require that action be taken to stabilize the FHA, stop losses, and begin to rebuild reserves into the future.  There has been a lot of pressure for the FHA to take much stronger action, including increasing the minimum down payment, currently at 3.5%.  This would be a single large step, but the FHA has chosen to take several smaller steps instead, hoping that there will be less negative impact on the weak housing markets.  The increase in the mortgage insurance premium is one of those actions.

Another step taken will be to reduce the amount of money sellers can contribute to the deal to help buyers.  The decrease, slated to take effect in the summer, will be dropping the seller closing cost assistance maximum from 6% down to 3%.  The FHA is also asking Congress to allow the increase of the annual mortgage insurance premium for 30 year fixed rate mortgages by 0.35%.  Though they do say that if this is allowed, the upfront premium will be taken back down to 1%.

Another change also involves the requirement of 10% down for all credit scores less than 580.  However, I don't see this impacting any borrowers since lenders are not currently accepting FICO scores less than 620.  The minimum 620 credit score is an addiitonal guideline overlay required by lenders that is over and above the FHA guideline.

It's a continuing chess game of moves to bolster the housing market and the FHA's financial health at the same time.

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