FHA Lending Changes to Affect Consumers

FHA Lending Changes to Affect Consumers
  • Opening Intro -

    Consumers shopping for a mortgage will soon find that the Federal Housing Administration (FHA) is instituting several changes in a bid to manage and protect its own single-family insurance program.

    The changes are effective as of June 3, 2013, for FHA case numbers assigned as of or after that date.


PMI Changes

The heart of the change has to do with private mortgage insurance (PMI), what consumers must pay when putting down less than 20 percent equity on a new home. Previously, once consumers reached approximately 20 percent equity, PMI could be dropped saving them money.

Under the new arrangement, home buyers will be required to keep PMI for the life of the loan. For those putting down at least 10 percent, the mandate is for at least 11 years of payment. In effective, consumers will pay hundreds of dollars more per years for their mortgages, perhaps well over $15,000 for the life of the loan.

FHA Losses

The FHA’s changes are in a bid to bolster its own reserves. The FHA is self-insured and has been running at a loss as loan defaults continue to have an adverse impact on its operation. By keeping PMI in place and by increasing its up front fees, the FHA is looking to generate enough revenue to offset its losses.

The changes will also likely encourage borrowers to look elsewhere for loans, with Freddie and Fannie loans two options. The FHA would be satisfied with a smaller market share. In 2012, Senate Banking Committee member Sen. Richard Shelby criticized the FHA for its massive losses noting that, “the FHA fund has been below its statutory minimum capital levels” for four consecutive years.

Unlike Freddie and Fannie, the FHA is not a mortgage lender. Instead, it insures mortgages by making it possible for borrowers to put down as little as 3.5 percent to buy a home.

A Strong FHA

With the FHA cutting back on its reach, the federal government hopes that private capital will return to the housing market. A stronger FHA would still serve many first-time home buyers, but those that are insured by it would continue to pay PMI longer, perhaps as long as their mortgage is insured by the FHA.

For would-be home owners, the coming changes may mean that some people will seek to buy a home before the June change. If so, we may see a spike in home sales in May, perhaps giving the economy a much needed boost too.

See Also — 4 Timely Tips for First Time Home Buyers



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Categories: Financing

About Author

Matthew C. Keegan

Matt Keegan is a freelance writer and editor as well as publisher of "Auto Trends Magazine", an online publication. Matt covers campus, consumer, business and financial topics on various websites and weblogs, and has been published in the "Houston Chronicle", "Sam's Club Magazine" and "Wisconsin Golfer".