Federal Housing Administration plans mortgage rate increases

For sale

The FHA is planning on increasing mortgage rates, even though housing is still weak. Image: Wikimedia Commons

The Federal Housing Administration is the federal government agency charged with helping guarantee mortgages. The FHA does not directly provide no credit loans for homes, but guarantees loans to certain classes of borrowers. The FHA is required to keep about 2 percent reserves in case loans go bad, but they currently only have about .53 percent reserve. Interest rates on FHA loans will be going up on September 7, though there are plans in place to actually help reduce average payments.

FHA provides bad credit loans

The home mortgage loans that the FHA backs are usually targeted to borrowers with bad credit that need money now. The FHA loan programs help reduce the necessary down payment. Currently, the down payment required for an FHA loan is about 3.5 percent of the value of the home. Some senators tried to increase the required down payment to 5 percent, but the bill was struck down. Currently, the FHA originates about 20 percent of the mortgage loans for people with bad credit.

Requirements for FHA reserves

Currently, the FHA has cash reserves on hand that would be able to cover only .53 percent of the loans they have currently . Federal law states that the FHA have reserves on hand to cover 2.0 percent of their loans. In order to make up this gap, the FHA requested permission to increase the rates charged on loans they guarantee. Lawmakers approved an increase of 1 percent on the premium for home insurance paid over the life of the loan. This new fee will go into effect on September 7, though it will be phased in depending on the size of the borrower’s down payment. The move is expected to raise $3.6 billion per year.

Payments on FHA loans

The borrowers that have FHA loans will be seeing increases in their payments, though not as much as some expect. While the amount of money paid over the life of the loan will be increasing, the origination fees will be going down. The loan origination fee will be going down from 2.25 percent of the loan to 1 percent. This means that homeowners who have gotten the loans will pay about $40 per month more for their loans, but less for the origination.