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Friday, May 10, 2013

Fee-laden FHA mortgages cost more than privately insured loans?

Fee-laden FHA mortgages cost more than privately insured loans
Source: Los Angeles Times

On April 1, fees for low-down-payment mortgages insured by the Federal Housing Administration (FHA) rose for the third time in two years. The hike in fees serves a two-fold purpose: to help shore up the FHA’s sagging mortgage insurance fund, which is dangerously low; and to reduce the government’s footprint in the mortgage market.
Making sense of the story
  • The FHA has always been the first choice of low down payment-borrowers who couldn’t meet the private sector’s more rigid underwriting standards. And, as the housing market descended, the FHA picked up the slack as private insurers backed out of the market.
  • As of April 1, the FHA raised its annual premium by 0.05 percentage points to 0.1 percent, depending on the loan amount and the loan-to-value ratio. That increase is in addition to an earlier increase of 0.1 percentage points in the annual fee instituted in April 2012, as well as the hike in the upfront mortgage insurance premium, to 1.75 percent of the loan amount, up from 1 percent.
  • Lenders require insurance, either private or government-based, on mortgages in which there is a down payment of less than 20 percent. Such loans are considered more likely to default than those in which borrowers have more of their money on the line.
  • Currently, the FHA will allow borrowers to cancel PMI coverage once their loan-to-value ratio reached 78 percent of the original loan balance, and the borrower has made payments for five years. Starting June 3, the FHA will require borrowers to pay the premium as long as the loan is in force. In other words, the only way to stop paying PMI is for the borrower to refinance or otherwise pay off the loan.
  • In addition to a down payment, borrowers also have to set aside money for closing costs, which can run into the hundreds or sometimes thousands of dollars.
  • Lenders charge all manner of fees, some of which are negotiable, while others are not. Lenders are required to itemize all fees required to close the deal, so borrowers should review them carefully.
  • Lenders may charge borrowers to cover items such as credit reports, appraisals, documentation, and administrative costs. The total expense will vary depending on the particulars of the situation.

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