If you're thinking about an FHA mortgage, you might want to act fast to avoid some higher fees that are kicking in soon.
Starting this spring 1, the FHA is not only raising fees for mortgage insurance across the board, but most borrowers will be required to carry the insurance for the life of the loan. That's a big change from the current rules, which allow borrowers to cancel mortgage insurance once they've had the loan for at least five years and paid down the balance to 78 percent of the home value.
The changes are meant to help bolster the FHA's Mutual Mortgage Insurance fund, basically its cash reserves, which have fallen below their congressionally mandated minimum. Lawmakers have also been pushing for government-related entities such as the FHA to reduce their role in the mortgage market and the new changes will make FHA loans a less attractive option for many borrowers.
Insurance premiums going up
Effective April 1, the annual fees for mortgage insurance on most FHA loans are being raised by 10 basis points, or 0.1 percentage points. That would raise the monthly payment on a $250,000 mortgage by about $21 a month, or $250 a year. For 30-year jumbo loans with more than 5 percent down, the increase will be only 5 basis points.
The borrowers who will really get socked are those taking out 15-year FHA mortgages with a loan-to-value ratio of less than 78 percent. Beginning June 3, those borrowers will pay an annual mortgage insurance premium of 45 basis points (0.45 percent), compared to no mortgage insurance premium currently.
Perhaps the biggest change is one that will require borrowers making a down payment of less than 10 percent to carry mortgage insurance for the life of the loan, also effective June 3. Those making larger down payments will have to carry mortgage insurance for at least 11 years, up from five currently, although that change does not take effect until June 3.
Currently, most borrowers who sign up for mortgage insurance do so with the expectation of being able to cancel it once they pay their loan down to a certain level. That's always been the case with FHA mortgages and still is true for conforming loans backed by Fannie Mae and Freddie Mac, where mortgage insurance can be canceled once the loan-to-value ratio reaches 80 percent.
Since one of the most popular features of FHA mortgages is the fact you can put as little as 3.5 percent down, this will affect a lot of FHA borrowers, particularly first-time homebuyers.
Tighter lending standards, higher jumbo down payments
The FHA is also tightening the loan requirements for borrowers with lower credit scores and high debt loads, though most borrowers are already reluctant to accept such loans even with an FHA endorsement.
Further down the road, the FHA has indicated that it also intends to raise the minimum down payment on jumbo loans to 5 percent from 3.5 percent currently, though the timetable for that is not yet clear.