By Brian Davis
The largest insurer of mortgages in the world, the Federal Housing Administration, has announced that new mortgage borrowers should prepare to pay more for their mortgages, because changes are coming (again).
As they announced last year around this time, the FHA is raising rates once more, this time by 10 basis points (0.1%) on nearly all new mortgage loans insured by the government agency.
But more drastic will be the requirement that borrowers pay the FHA premium for the entire life of the loan, instead of ceasing to charge once borrowers have paid their loan down to 78% of the home's value.
Consider an example: Helen Homebuyer wants to buy her first house. Helen puts a home under contract for $200,000 (the current median U.S. real estate sales price is $202,100), and has saved up the 3.5% down payment she needs ($7,000 down, $193,000 loan), plus the $13,000 she will need for closing costs. She has to pay an additional 1.75% of the loan amount to the FHA as an up-front fee ($3,378), and now she will pay an annual premium to FHA of 1.35% of the loan ($2,606/year). But instead of paying $2,606/year for only the first 5 years (as currently required), she will have to pay all 30 years of her loan – that means she will pay $81,543 to the FHA for the life of her loan, instead of $16,405. Put differently, she will have to pay the $217/month FHA insurance premium for not just the first 5 years, but all 30.
This time last year, before their last round of rate hikes in Spring 2012, she would have paid $1,930 up front (instead of $3,378), then $2,413/year for the first 5 years (instead of $2,606), or $13,993 (instead of $81,543) for the total FHA fees for the loan.
First-time homebuyers are especially critical to boosting real estate markets because they add to the net demand for homes. When an existing homeowner sells his house and buys another, it is a net-neutral transaction for consumption of homes, but first-time homebuyers are not adding to the supply by selling, they only add to the demand side.
The FHA asserts that these new fee requirements are necessary to boost reserve coffers that were strained by all of the borrower defaults during the Great Recession and its aftermath. In other words, says the FHA to Helen Homebuyer: "Your parents didn't pay their bills, so you will pay more to buy your first house." And by more they mean $81,543 instead of $13,993.
In an additional change, the FHA now requires that borrowers with debt-to-income ratios above 43% and credit scores below 620 must have their loans manually underwritten by the Administration. Alas, if this policy had been implemented a few years ago, perhaps they would not need to keep hiking fees and making it more expensive and difficult for legitimate, responsible borrowers to become homeowners.