Effective April 1, 2012, fees associated with purchase mortgages insured by the Federal Housing Administration (F.H.A.) may increase. The Agency recently announced that it will increase its annual mortgage insurance premium from 1.15 percent to 1.25 percent for all loans under the threshold amount of $625,500. Similarly, effective June 1, 2012, the Agency will increase such premiums for larger loans to 1.5 percent-a 0.35 percent increase. These premium increases would be divided by 12 and paid on a monthly basis.
In addition, the F.H.A. will more than double its upfront mortgage premium. This premium will rise from 0.75 percent to 1.75 percent. Although this is a substantial increase, in effect borrowers will roll this increase into the mortgage and avoid actually paying for this increase as a lump sum, out-of-pocket cost of borrowing.
At first blush, these increases may seem out of place given the stagnant housing market and the decrease in certain refinancing fees that the White House rolled out last week. However, F.H.A. is seeking to advance duel purposes with these increases. First, the Agency is increasing the revenue it receives from these borrowers to help replenish its reserves. According to the F.H.A. its reserves have been become significantly depleted due to the increased rate of defaults on mortgages that they insure. Second, the Agency is hoping to encourage some borrowers to return to private lenders for traditional mortgages instead of relying on F.H.A.
Traditional mortgages require either a 20 percent down payment or the purchase of private mortgage insurance (PMI). However, F.H.A. backed mortgages require as little as 3.5 percent down from borrowers with decent to good credit. The F.H.A. is hoping that the increase in fees will entice potential borrowers to look into traditional mortgage financing and borrow from private lenders. Borrowers with good credit (credit score of at least700) may pay up to $40 less per month through a traditional mortgage than they would through the F.H.A.
Some experts believe that the increase will not significantly affect the number of borrowers going through the F.H.A. because, in comparison, it is still a much better deal for borrowers-especially first-time home owners. Thus, the only real effect of these increases is the replenishment of the reserves. Hopefully none of these changes will have an adverse effect on the shaky but recovering housing-market.