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FHA to Ask $500 More

By Sally Maison
Published: Wednesday, January 27th, 2010

Homebuyers apply for FHA loans because it allows them to borrow at low interest rate and low down payment even if they do not have top-tier credit scores. But this week, the Federal Housing Administration that it will cost more to get a federal-insured loan this year.

FHA to Ask $500 More FHA officials announced that homebuyers will be asked $500 more for every $100,000 they borrow. Most conventional housing loans require borrowers to pay down at least 10 percent of the amount they want to borrow. On the other hand, FHA loans only require 3.5 percent down payment, even for borrowers whose credit scores are far from excellent.

FHA does not issue but insures mortgages instead. The Housing Administration reimburses lenders for financial losses should FHA-backed individuals default on their housing loan. Borrowers are the ones who pay for the insurance even though it is the lenders who benefit during the reimbursement. As in a usual insurance policy, individuals who get FHA loans have to pay premiums. First, they pay an upfront premium and a yearly premium. The upfront premium for borrowers is bound to increase this spring while FHA will seek permission from Congress to increase its annual premium later. The upfront premium is paid in full during the closing of a mortgage loan.

Currently, that premium is equivalent to 1.75 percent of a loan amount. This spring, it could go as high as 2.25 percent. For a $100,000 home loan, the current premium borrowers pay is $1,750. Once changes are implemented, they will be required to pay $2,250.

But borrowers do not have to feel the burden of paying $500 for every one hundred grand they borrow. They can opt to include the upfront premium in the total amount of loan they want to borrow. This means they can borrow $2,250 more for every $100,000 in their mortgage loan.

The annual premium depends on how much a first-time buyer pays down during his application. In a refinance, that amount depends on how much equity a property has. If the equity or down payment is less than 5 percent, the yearly premium is 0.55 percent of the total amount borrowed. The annual premium for people who have down payment or home equity of 5 percent or more is .5 percent of the loan amount.

Aside from higher premium rates, the agency has also set its credit score bar higher. Currently, borrowers are required to have a credit rating of at least 580 to get federal insurance on their mortgage. Borrowers whose credit score are below the minimum will be required to pay down 10 percent of their loan.

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