How Will the FHA’s Money Woes Affect Borrowers?

• November 20, 2012

by Shilpi Paul

For homebuyers who aren’t able to pull together a 20 percent down payment, FHA-backed loans, which allow for down payments as small as 3.5 percent of the home price, have been a boon in recent years.

However, the agency reported a deficit of $16.3 billion earlier this month, which means that it might require a taxpayer bailout for the first time in 78 years. It will also mean that FHA loans are going to get more expensive for borrowers.

According to a Bloomberg article, the current troubles are largely related to policies put in place during the housing boom that led to defaults and delinquencies. The agency is now working to adjust their policies in order to avoid a bailout.

So, how will all this impact consumers? Here are a few implications:

• The FHA loan limits will likely come down. — As we reported last year, the FHA has been pushing loan limits higher in recent years, to the consternation of opponents. Currently, the FHA is able to back loans as high as $729,750. (In the past, the ceiling has been as low as $362,900.) The limit will likely be lowered in light of the financial troubles.

• Borrowers will have to pay increased insurance premiums. — FHA loans will become more expensive for borrowers, as the agency is raising the annual insurance premium by 0.1 percentage point in January, raising monthly costs by $13, on average. Also, right now, the agency allows borrowers to stop paying mortgage insurance after a certain period of time (5-10 years) once certain requirements have been fulfilled; the FHA is planning to change that policy, so that borrowers will pay insurance over the entire life of the loan.

• The required minimum down payment may increase. — One of the most alluring aspects of the FHA loan is its low down payment requirement of 3.5 percent of the total purchase price. Those that have been pushing to raise the down payment in past years may get their wish in light of recent news.

This article originally published at http://dc.urbanturf.com/articles/blog/how_will_fhas_money_woes_affect_borrowers/6323