Expect to hear from the Federal Housing Administration (FHA) today, regarding rate and fee increases associated with obtaining FHA insured mortgages. According to a Wall Street Journal article, the increased borrower fees are necessary to avoid the future need for an FHA bailout. In recent years, FHA insured mortgages made up about 5% of all mortgages, in our market. The economic crisis, increased difficulty in obtaining conventional financing and low down payment requirements has boosted the ratio of FHA insured mortgages from 5% to 40%, in our market.
According to the WSJ article, the upfront insurance premium charged on all FHA mortgages is expected to increase from 1.75% to 2.25%. The additional fees are meant to ensure a safe operating level of required capital reserves. The FHA doesn’t make mortgage loans; it insures the mortgage lenders against buyer default. Capital reserves are in place to pay the lenders should the homeowner default. When this happens, the homes are then taken back by the FHA and sold as HUD owned properties.
Additionally, there has been mention for a few months that the current 3.5% down payment requirement will also increase. This low down payment requirement has been a significant reason for the increased popularity of FHA insured mortgages. Industry analysts have been pushing to raise the down payment requirement to 5%. The intent is that homeowners with greater equity and interest in the property will be less likely to walk away or lose the asset.
Also, look to see seller paid contributions reduced from the current 6% to 3% of sales price. It is believed that higher seller paid contributions have led to mortgages greater than the home’s value. There are much tighter guidelines on loan to value ratios, and for good reason.
Should these changes become reality, it will likely push or delay some from entering the housing market. Is that a bad thing? It’s probably long overdue. It’s time to get back to sensible lending requirements and FHA insured mortgages should be no exception. It will be a very long time before we see the days of little or no down payment required loans, if ever. We’re looking at the consequences of those products, right now. Conventional wisdom shows that when one has had to work hard to achieve something, it’s usually far more rewarding. So, work hard, save money and when you make that purchase, you’ll be happy you did.