For decades, prospective homeowners have turned to the Federal Housing Authority (FHA) for special mortgages that have lower down payments, lower closing costs and easier credit qualification standards. However, in the coming months, potential homebuyers will be subject to increased costs and face tough credit requirements if they’re on the search for FHA loans.

USDA / flickr |

USDA / flickr source

Higher fees for a longer period of time

Starting April 1, 2013, borrowers will pay a mortgage insurance premium rate of 1.35 percent, up 0.1 percent from 1.25 percent. The rate hike may not sound like a major difference but, combined with another upcoming change, borrowers will shoulder a heftier financial burden.

Beginning June 3, 2013, FHA loan recipients must pay for mortgage insurance for the life of the mortgage. Under the current rule, the FHA stops charging for mortgage insurance when borrowers repay 22 percent of their original loan amount. (Those with 30-year FHA loans must pay mortgage insurance for at least five years.)

Currently, a borrower with a $150,000 FHA mortgage will pay $1,875 per year, or $156 per month, for mortgage insurance. When the new rules kick in, a borrower with the same mortgage will face an annual premium of $2,025 (or monthly installments of $169) on mortgage insurance.

Time to beef up that credit score

Starting this year, the FHA will also make it more difficult for people with FICO scores under 620 to get loans. Credit scores between 620 and 679 are considered average. Those below 620 are considered low. Anyone with a 620 credit score seeking a mortgage should expect to find non-prime offers rather than prime and superprime mortgages that offer the lowest rates.

The FHA says that many of the lenders working with them already worry about giving loans to people who have FICO scores of 620 and under. Exceptions, however, are often made for borrowers who show that they have significant savings and can afford to pay four months of mortgage payments.

Showing that the borrower will have mortgage payments that equal less than he or she currently pays in rent also makes it easier for lenders to accept less-creditworthy borrowers.

Still, getting an FHA mortgage will now require more paperwork for people with average FICO scores. Those who have debts equaling 43 percent of their annual incomes will also face higher scrutiny and more thorough vetting before receiving a loan.

Effect on homebuyers

For low-income borrowers, who tend to be the demographic that relies on FHA loans, the long-term costs of paying mortgage insurance can significantly impact their finances.

This means that families who use FHA loans will have reduced purchasing power in the longterm. A family living on minimum wage doesn’t have excess cash to spend on luxury items. Every dollar they spend goes towards necessities. By raising the mortgage insurance premium and extending the time period in which this premium must be paid, the FHA loan applicants may think twice before buying a home.

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