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Tuesday, March 8, 2011

Higher Costs Ahead for FHA-Insured Mortgages

This higher insurance premium is going to be a bigger and bigger issue.  Eventually, FHA might no longer exist.
The FHA currently can insure loans of up to $729,750 in high-cost markets, but the Obama administration recently recommended that those higher limits, which vary by market, expire in October. That would push the top limit down to $625,500, shrinking the pool of eligible borrowers. And those limits may be reduced even further.
Meanwhile, on April 18, the annual mortgage insurance premium on new FHA loans is set to rise by a quarter of a percentage point on 30- and 15-year mortgages, a move that will "bolster the FHA's capital reserves and help private capital return to the housing market," said David H. Stevens, the FHA's commissioner, in a news release. That change will mean an average increase of $30 to a borrower's payment each month.
There could be more changes on the way, too. "A lot of people think it's just a matter of time before they increase the down payment from 3.5% to 5%," said Guy Cecala, publisher of Inside Mortgage Finance.
The impact of ending this program is huge.  First, 30% of the mortgage are currently insured by FHA.  Second, mortgage underwriting will probably require a higher down payment if this program is ended.  Either way, this will put pressure on prices and demand.
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