FHA Changes Could Hurt Your Wallet

Buying a house in 2013? If you’re planning to use an FHA-insured mortgage to fund your purchase, you could experience sticker shock?  Recent changes to FHA fees and rules have made this government backed mortgage option a lot more expensive for certain borrowers. Let’s take a look at some of the changes and how they could impact you:

Low Credit Score Could Exclude You

While FHA-insured mortgages have been a lifesaver for many borrowers with low credit scores and a few credit history blemishes, the agency seems to be moving away from this high-risk demographic. Borrowers with a credit score below 620 and a debt-to-income ratio of 43 percent or higher must now go through a mandatory manual review of their application before their FHA loan is approved. If you’re on the borderline of this credit score, it may be wise to improve your credit score before applying for an FHA loan. Or, you may consider a Fannie Mae or Freddie Mac option, as well as a conventional loan.

PMI Could Bleed You Dry

FHA has announced that as of April 1, 2013, their mortgage insurance premiums (PMI) for most new loans will increase by one-tenth of a percentage point. But that’s not all. In the past, the FHA allowed borrowers to cancel their PMI once their loan balance was 78% of their home value, now borrowers will no longer have that option. Once you have PMI on your FHA loan it will remain there for the life of the mortgage. This is important to consider because even conventional loans give you an option to cancel PMI once you have enough equity in your home.  If you’re forced to get PMI, you may decide to forgo an FHA mortgage to avoid the long-term costs.

Higher Down Payments

In response to a slew of losses experienced during the mortgage crisis, the FHA is increasing the amount of cash borrowers must bring to the table. For high cost areas such as California, the FHA is requiring a minimum of 5 percent down. At this point the Seattle area is not affected by this new down payment increase, but buyers should keep an eye out for possible changes in the future.

Before taking out an FHA loan in 2013, work with a mortgage expert to review other options and use the best VA home loan calculator. Remember, the PMI and down payment requirements are most likely to have the most financial impacts. Even if you’re not sure that you will qualify for a conventional loan, you should at least see if it would be beneficial.