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Congress has passed legislation allowing FHA to raise mortgage insurance premiums charged to new borrowers. Here's what you need to know.

FHA Guidelines: Understanding FHA Mortgage Insurance

Concerns about shrinking FHA cash reserves prompted the agency to seek permission to raise its mortgage insurance premiums charged to FHA borrowers. FHA does not make mortgages, but instead guarantees loans made by FHA lenders. This provides mortgage lenders a safety net as incentive for making loans with lower down payments and flexible underwriting allowed by FHA guidelines.

  • In exchange for the additional risk associated with making FHA loans, borrowers pay FHA mortgage insurance premiums. This is collected in two ways in order to make the cost less difficult for borrowers to pay:
  • Up-front mortgage insurance premium (UFMIP): The UFMIP is currently charged at 2.25 percent of the mortgage amount; when the new legislation becomes effective, FHA is expected to lower this amount to 1.25% to reduce cash paid up-front by FHA borrowers. Another option for paying the UFMIP is rolling it into the loan amount and repaying it over your mortgage repayment term.
  • Annual mortgage insurance premium (MMI): The acronym MMI refers to how this insurance premium is collected via monthly mortgage payments. MMI is currently calculated at .55 percent of the original loan amount, but once the new legislation becomes effective, it is expected to increase to .90 percent, which for a mortgage of $150,000 would be $1350 per year. When pro-rated monthly, this would add $112.50 to your monthly mortgage payment.
  • Ask friends and family to donate to your home savings in lieu of gifts and gift cards: Asking for money can be a touchy issue, but your loved ones will likely agree that buying a home is a worthy goal.

    • Direct overtime earnings to home savings: If your job provides overtime pay, work extra hours when you can and add your overtime pay to your home savings.
    • Take on a part-time job dedicated to home savings: Direct all income from part-time or one-off jobs to your home savings account. Do the same with proceeds from garage sales and other extra income.Direct overtime earnings to home savings: If your job provides overtime pay, work extra hours when you can and add your overtime pay to your home savings.
    • Deposit "found" funds into your home savings: Dedicate tax refunds, bonuses, miscellaneous refunds, and any other unexpected windfalls to your home savings.

    Although critics frequently characterize FHA loans as "expensive," it's important to know that conventional mortgages requiring less than 20 percent down also require mortgage insurance (MI). Annual premiums are pro-rated monthly and added to monthly mortgage payments.

    FHA loans offer first-time buyers and those short of cash but ready to buy a home an opportunity to take advantage of current low mortgage rates. Reviewing and comparing mortgage quotes from several FHA lenders can help you find the home loan or refinance mortgage you want.

    Karen Lawson
    Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.