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FHA to Raise Mortgage Premiums

The Federal Housing Administration has issued a series of changes to FHA mortgage programs designed to bolster the agency’s capital reserves. The changes will limit the ability of some borrowers with low credit scores to qualify for loans, and raise minimum down payment requirements and premiums for borrowers. On most FHA loans, the annual premium will increase by 0.10 percentage point, or $100 for each $100,000 in loan amount.  For loans greater than $625,000 with a term longer than 15 years, the increase will be 0.05 percentage point to 155 basis points (the maximum currently allowed by law.) The FHA intends to raise the annual mortgage insurance premium on most loans that have a case number starting April 1 or later.

As of April 1, 2013, FHA’s full drawdown reverse mortgage program, the Standard Fixed Rate HECM, will no longer be available to borrowers who seek a fixed interest rate mortgage. Additionally, borrowers with a FICO credit score below 620 and a total debt-to-income ratio of more than 43 percent will not be eligible for processing through FHA’s automated underwriting system, TOTAL Scorecard. Such will have to be processed manually, with lenders documenting compensating factors such as a larger down payment or a higher level of reserves.

In addition, the FHA has announced that borrowers will have to continue paying annual mortgage insurance premiums for a longer period of time – in most cases the life of the loan. This change will apply to new loans with case numbers starting June 3. In the past, FHA has automatically canceled mortgage insurance on most loans when a borrower, anytime after 5 years, has made enough payments to reduce the balance to 78 percent of the original loan amount.

In the future, if the borrower starts off with a loan-to-value ratio above 90 percent, FHA will collect the premium for the life of the loan. If the original ratio is between 78 and 90 percent, FHA will cancel the premium if the balance drops below 78 percent of the original loan amount anytime after 11 years.