Mortgage Loans

If you’re thinking about taking out an FHA mortgage to buy or refinance a home, there are some new rules you need to be aware of.
Beginning April 5, 2010, the up-front mortgage insurance premium on FHA mortgages is increasing substantially. Instead of 1.75 percent of the loan amount, the new premium will be 2.25 percent, due on any FHA loan. For every $100,000 borrowed, that works out to an additional charge of $500 due at closing, or a total of $2,250; double that for a $200,000 mortgage.

The other major change is that the FHA is slashing the allowed seller contribution in half, to 3 percent of the purchase price instead of 6 percent. That means that the maximum the seller can contribute toward closing costs, assessments or other fees associated with the home purchase is 3 percent of the total, or $3,000 per $100,000 of purchase price.

Still as little as 3.5 percent down

The minimum down payment required will remain unchanged, at least for now; most borrowers will still be able to qualify for an FHA loan with only 3.5 percent down. However, the FHA is increasing the minimum credit score needed to qualify for a 3.5 percent down payment loan to 580. Even so, this may be a moot point, as many lenders are requiring minimum scores of 620, even though the FHA is insuring the loans.

With lenders greatly tightening credit requirements in the wake of the collapse of the subprime mortgage markets, FHA mortgages have grown increasingly popular as one of the few places borrowers can still get a home mortgage with 3.5 percent down. (The VA is the other option, but is limited to military veterans and their families). But having suffered its own losses in the mortgage meltdown, the FHA is tightening its own credit standards to limit future losses.

One thing to keep in mind is that although the FHA sets minimum standards for the loans it will insure, each lender has its own standards for the loans it will issue under FHA terms. So if you’re rejected by one lender, you may still be able to find another who will be willing to underwrite you.

Broker can help find willing lender

This is a situation where a mortgage broker, who is familiar with the lending requirements of a wide range of lenders, can come in handy. Be aware that you will have to pay a premium for this service, however, either in the form of an upfront fee or, more likely, a slightly higher interest rate.

The FHA is typically the lender of last resort for borrowers who cannot obtain conventional mortgages through the private market. The interest rates are pretty much the same, but you do pay more upfront in terms of the FHA mortgage insurance premium, which makes it a most costly option.

In addition to the upfront premium, you also have to pay an annual insurance premium equal to 0.55 percent of the loan balance unless you’ve made a down payment of 20 percent or more on a 30-year loan, or 10 percent of more on a 15-year loan. This charge is unchanged from before April 5 and is roughly equivalent to what you’d pay for private mortgage insurance on a standard mortgage with less than a 20 percent down payment, so that’s pretty much a wash.

The annual insurance premium is automatically lifted after you reach a loan-to-value ratio of 78 percent, provided you’re been making regular payments for at least five years under a 30 year loan; there is no minimum time limit under 15-year loans.