he Federal Housing Administration is a department in the government that gives new homebuyers and people with low credit scores, the chance to purchase a home through low rate mortgage lenders. The way it works is an applicant will apply to the Federal Housing Administration (FHA) for a loan. The FHA won’t give the new homebuyer a loan, but they will give them a chance to get a loan through a good lender that can give them a low down payment and low mortgage rate. The cost of receiving an FHA loan is an insurance premium. This premium is there because, in the event the homeowner defaults on the loan, the FHA is responsible to the lender to cover the defaulted loan. In recent news, this premium has become the topic for discussion. In the Reuter article, “FHA hikes mortgage fees to bolster reserves” they updated us with the situation at hand.
As of now, the mortgage insurance premium for and FHA loan is 1% of the mortgage. The FHA has decided to increase this number by .75% starting on April 1st, 2012. The FHA has estimated that the monthly payment for the average $150,000 loan will increase by approximately $5. They believe that the increase in premium should be affordable for the average FHA loan holder.
So why is the premium increasing? In 2008, when the housing market crumbled, the FHA was forced to pay for all the defaulted loans that they had been backing. Many homeowners who were using an FHA loan were defaulting on their FHA loans, thus the FHA was obligated to use all of their reserves to cover the cost.
The congress had previously put a limit on the reserve, so that it would always maintain a certain balance. After 2008, they had dropped well below the mandated balance. Now, they are trying to raise premiums, so that they can bring their reserves to a legal level.
Despite the increase in premiums, FHA loans are still an excellent opportunity for first time home owners. They can still get homeowners low down payment and low mortgage rates. The FHA raised their rates, simply because needed to boost their reserves, so they can continue to offer their services. Premium’s aside, FHA loans will continue to be a valuable resource in helping new home buyers purchase their first home and also bring the mortgage market back to a healthy state.