The Rising Cost of Low-Rate FHA Loans

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In the wake of the housing bust, the Federal Housing Authority (FHA), once a lender of “near-last resort” for moderate-income buyers, has become a lender of “first resort” for pretty much everyone. The agency estimates that it now insures about 40% of all purchase mortgages—ten times its 2005 market share.

Its newfound popularity is straining the FHA, which must comply with mandated reserve limits. Partly to shore up its reserves, and partly to control demand, the FHA has just adopted a clutch of new rules that might hit renovation-minded homeowners in particular. Here’s the good news:

LOANS IN GOOD STANDING
If you already have a loan in good standing, it will cost you less to refinance it with the FHA. If you’re one of the 3.4 million households with an FHA mortgage made before May 31, 2009, you are eligible for the break, which could save you as much as $250 a month, depending on the size of your mortgage. It’s the government… and it’s lending, so you know there’s a catch. Here’s the bad news:

LOANS IN DISPUTE
If you have an ongoing credit dispute of $1,000 or more, you must resolve it before getting a new or refinanced FHA loan.

Problematic credit situations of all stripes can put a full stop to your FHA application, but homeowners who have hired contractors have an extra layer of exposure to the new rule. Anyone who has dealt with a contractor knows that disputes are as common as crabgrass, and contractors have the right to put liens against properties to force owners to pay up or settle. That means it’s easy for a lender to discover a contractor-related credit problem; it’s right there in the county records to be discovered with a few mouse clicks.

The only solution is to clear up the dispute, at least to the degree that you can prove to the FHA that you have a payment plan in place.

Finally, if you’re counting on an FHA loan to buy a house, you’ll pay more for the insurance that covers your low-down-payment mortgage. To rebuild its reserve funds, the FHA increased its mortgage insurance premium by 0.10% for loans under $625,000 and by 0.35% for loans over that amount. The initial fees also rose by 0.75%, because you aren’t already forking over enough cash at closing.

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