Bill allowing FHA to raise annual mortgage insurance premiums passes the House

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On Thursday the House of Representatives voted 406 – 4 to allow FHA the ability to raise the annual mortgage insurance premium they charge the borrower from the current level of 0.55% of the unpaid loan amount, to as high as 1.5%, although FHA says they intend to raise it only to 0.9%.

Currently FHA charges two mortgage insurance premiums, one which is called “Up Front Mortgage Insurance” which currently is 2.25% of the loan amount and is financed into the borrowers loan, and an Annual Mortgage Insurance Premium which is added to the monthly payment.

Here’s how this works and how the changes could affect you:

According to Zillow the median price of a home in Salt Lake County is $239,900.  With an FHA loan you will put down 3.5% on the home, so your loan amount will be $231,504.  Financing the UFMIP (Up Front Mortgage Insurance Premium) brings the loan amount to $237,712.  Currently the monthly mortgage insurance fee would be $109.  If the FHA gets it’s way the monthly insurance fee would increase to $179 under their stated increase to 0.9%.  If FHA was to increase the annual premium to 1.5% the monthly mortgage insurance fee would increase to $297 a month.

FHA has sold this to Congress as having less impact than the up front mortgage insurance.  But I don’t see how.  Financing the up front mortgage insurance fee of $5,209 only adds about $27 a month to a $231,000 loan.  Increasing the monthly fee to 0.9% increased the monthly payment $70 a month and increasing the fee to 1.5% increases the monthly payment to $188 a month.

What this is going to effectively so is decrease how much home a borrower qualifies for.  With principal, interest, taxes, mortgage insurance and home owner’s insurance it requires a household income of $63,000 a year to qualify for the $239,900 home mentioned above.  With the proposed increase to 0.9% annual mortgage insurance premium that same home buyer will only qualify for a $227,000 home.  If FHA were to raise it to the maximum allowed by Congress, the same home buyer will only qualify for a $205,000 home.

We already have a gap between the median income in Salt Lake County and the average price of a home.  According to the U.S. Census Bureau the median household income in Salt Lake County is $58,000, which qualifies for a $220,000 home under the current FHA guidelines.

So you can see that an increase in FHA fees will simply widen this gap, causing home sellers to have to discount their selling price even further for a buyer to be able to qualify for it, and thus bringing down market values of everyone’s homes even further.

This can’t be good for an economic recovery.

As I see it this is simply a way for FHA and Wall Street to further shore-up their books with the money of the American people, and our government giving them a free pass to do it.

If you would like to weigh in on this with your local Representative and Senator, you can find them here:

Utah State Senators

Find your Representative

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