Despite pressure, FHA mortgage insurance costs remain high
FHA borrowers may not be online for a break on their mortgage costs.
To buy a home, you’ll usually need to offer some sort of down payment (unless you qualify for a VA loan, where you can get away with 0% down payment). Conventional mortgage lenders will often ask you to put down a 20% down payment on your home, although some will accept less on closing.
But if you are really limited in the amount you can put on a home, an FHA loan may be a better option. FHA loans are guaranteed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). With an FHA loan, you can buy your own home with as little as 3.5% down payment. FHA loans are also a good bet for buyers with lower credit scores. You can qualify for an FHA loan with a score of only 580. For a conventional mortgage, the minimum credit score is 620, and some lenders have even higher credit score requirements than that.
FHA loan fees can be costly
There is only one downside to getting an FHA loan – you will be charged an upfront fee for that loan, along with ongoing fees. Initially, you will be required to obtain a mortgage insurance premium of 1.75% at closing. On top of that, you will pay a monthly premium ranging from 0.45% to 1.05% of your loan, depending on the specifics of your loan itself.
Why these fees? The FHA takes a certain level of risk by supporting mortgages. Thus, mortgage insurance premiums help the agency absorb part of a borrower’s default risk on a home loan. The same concept applies to private mortgage insurance for conventional borrowers who do not deposit 20% on closing. Insurance premiums paid by borrowers are extra money that goes into the pockets of lenders. This way, if a borrower defaults, that lender loses less money.
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Earlier this year, President Joe Biden sought to get HUD to cut FHA mortgage insurance premiums by 25 basis points. (The basis points describe the changes in mortgage interest rates at a small and precise level. One hundred basis points equals 1%. So 25 basis points is a quarter of 1%.) This change would make these home loans more affordable for borrowers. But now it looks like mortgage insurance premium costs are holding steady, and borrowers won’t have a break after all.
HUD holds on
This week, HUD Secretary Marcia Fudge made it clear that the agency will not, in fact, reduce the cost of mortgage insurance premiums. As such, this 25 basis point cutoff is irrelevant.
Now, with FHA mortgage insurance premiums not going down, that’s not good news for borrowers. But FHA loans are still a relatively affordable option for potential buyers who don’t have a lot of cash to bring at the close, so even if the premiums hold up, you shouldn’t necessarily be turned off. FHA loans are extremely forgiving for borrowers with poor credit. That alone makes researching FHA lenders an attractive option for buyers who are not in the best position to buy a home, but want to buy and feel they can afford it.