FHA Hikes Fees on Mortgages
Home buyers with mortgages backed by the Federal Housing Administration will soon see a rise in fees, the agency announced Monday.
The agency is raising its fees in an effort to try to recoup some of its depleted reserves*, which suffered from the rising number of home owners who defaulted on their mortgages. The agency also says it’s raising fees to try to encourage the return of more private capital to the market.
FHA loans allow for smaller down payments, as low as 3.5 percent compared to traditional loans, and they often have less stringent credit requirements, which have made them soar in popularity in recent years. (The agency insures loans but doesn’t issue them.) About 40 percent of all new mortgages for home purchases in 2010 were FHA-backed mortgages.
In particular, FHA will increase two fees that borrowers pay. Starting April 1, it will increase its annual mortgage insurance premium for loans under $625,500, bringing the total cost from 1.15 percent of the loan amount to 1.25 percent. Starting June 1, larger loan premiums will see an increase of 0.35 percent of a percentage point, bringing the total premium costs up to 1.5 percent of the loan amount, The New York Times reports.
FHA also announced it will raise a fee for the upfront mortgage premium by 0.75 of a percentage point, which will now total 1.75 percent of the loan amount.
The New York Times illustrates the impact of the increase in a recent article: For example, a borrower with a 3.5 percent down payment with a mortgage of $193,000 can expect to pay an upfront mortgage premium alone of $3,377, compared to the prior $1,930. That can be rolled into the mortgage.
The new fees will also apply to home owners who want to refinance their mortgages, the agency announced.
The raise in fees is expected to bring in $1.25 billion in additional revenue to the agency through September 2013.
Read NAR's view of the FHA's decision to raise fees.
Source: “Buyers Face Higher Fees at FHA,” The New York Times (Feb. 27, 2012)
* Editor’s Note: FHA maintains two reserve funds. The first provides reserves to cover each mortgage that's insured for 30 years; the second is a congressionally required 2 percent reserve, which FHA draws on first to cover losses. This 2 percent reserve fund has dipped in recent years part because of continuing declines in home values, which increases the amount of reserves (and therefore more quickly depletes the reserve fund) that the agency must maintain for each mortgage. For more on how FHA reserves work, see "Myths and Facts" by NAR’s Government Affairs.
