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Pending FHA Mortgage Insurance Increases Will Raise Borrowers' Costs

Changes recently implemented by HUD will increase the cost of upfront and annual mortgage insurance premiums for FHA insured loans with case numbers assigned on or after April 9, 2012. A second round of increases will go into effect for jumbo FHA loans assigned on or after June 11 with loan sizes ranging above $625,500 up to the maximum loan size of $729,750. These increases are geared to replenish the FHA's mortgage insurance fund, which was recently assessed at having a 50% chance of falling to a zero balance, potentially requiring a tax payer bailout.

The FHA does not make loans. Rather, it insures loans that meet its guidelines, which are extremely lenient with respect to a borrower's credit worthiness. FHA loans allow for credit scores as low as 620 and require minimal down payments of just 3.5% that can be gifted by a family member. There are no reserve requirements and higher debt ratios are permitted than by conventional loan programs. These lax requirements have earned FHA loans the moniker of "new sub-prime." As of December 31, 2011, 9.6% of FHA loans were deemed seriously delinquent and defaults had increased 18% over 2010 levels.

Despite high default rates and pending mortgage insurance increases, FHA loans will remain a boon for millions of borrowers, who will still enjoy the best long-term mortgage rates available. While certain borrowers with limited down payment funds or poor credit may have no loan option other than FHA, others may wish to weigh the increased costs against conventional financing options. Here is a breakdown of the pending mortgage insurance increases.

Currently, the FHA requires an upfront mortgage insurance premium of 1% that can be rolled into or financed by the new mortgage. In addition, there is an annual premium, pro-rated and collected monthly, of 1.1% of the mortgage balance for fixed mortgages with loan-to-value ratios (LTV) of 95% or less. LTVs above 95% carry an annual premium of 1.15%. (FHA loans with terms of 15 years or less and LTVs below 78% are exempt from the annual mortgage insurance premium.)

Changes Beginning April 9, 2012:

Upfront Mortgage Insurance Premium, All FHA Loans:

Increase from 1% to 1.75%.

Annual Mortgage Insurance Premium:

Terms Greater Than 15 Years

Any loan amount up to 95 LTV: 1.20% (increased from 1.10).

Any loan amount above 95 LTV: 1.25% (increased from 1.15).

Terms Less Than 15 Years, LTV Above 78%

Any loan amount less than 90 LTV: .35%.

Any loan amount above 90 LTV: .60%.

Changes Beginning June 11, 2012:

Annual Mortgage Insurance Premium

Terms Greater Than 15 Years

Loan amounts from $625,501 to $729,750

Up to 95 LTV: 1.45% (increased from current 1.1).

Above 95 LTV: 1.50% (increased from current 1.15).

Terms Less Than 15 Years, LTV Above 78%

Loan amounts from $625,500 to $729,750

Up to 90 LTV: .60% (increased from .35).

Above 90 LTV: .85% (increased from .60).

With the first round of mortgage insurance changes on April 9, FHA borrowers' monthly payments will undergo moderate increases. The biggest change will be the upfront premium increase from 1% to 1.75%. After June 11, and especially for borrowers needing loans above $625,500, the cost for FHA loans will be far more dramatic. For example: a borrower with a $729,750 loan above a 95 LTV would see their monthly mortgage insurance payment increase from $699 per month to $912.

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