Biden Seeks to Cut FHA Loan Premiums

Taking out an FHA loan could become less expensive.

Buying a home is easier said than done. To pull it off, you'll need to qualify for a mortgage, which generally means having a good credit score and a significant down payment. A 20% down payment used to be the norm, but these days many mortgage lenders will accept a lot less. In some cases, you could pay 10% of your home's purchase price. Some buyers, however, can't qualify for a regular mortgage based on those criteria, and that's where FHA loans come in.

An FHA loan is a special type of mortgage that's backed by the Federal Housing Administration. You can generally qualify with a lower credit score and as little as 3.5% of your home's purchase price down at closing. The downside, however, is you'll pay a mortgage premium when you sign an FHA loan. It's similar to the private mortgage insurance you'll be hit with when you don't make a 20% down payment on a regular mortgage, but you pay it for the life of the loan.

FHA lenders will charge an initial mortgage premium of 1.75% of your loan amount at closing. You can pay it up front or roll it into your mortgage and pay it off over time. In addition to that initial premium, you'll pay an ongoing monthly premium that ranges from 0.45% to 1.05% of your loan. Where your fee falls in that range will depend on the loan amount you take out and the amount of money you put down. But either way, the mortgage premiums associated with FHA loans can be costly. President Joe Biden, however, is looking to change that.

Are lower FHA mortgage premium fees in the works?

Before former President Donald Trump took office, the Department of Housing and Urban Development had announced FHA mortgage premiums would be reduced by 25 basis points. However, the Trump administration suspended that reduction. Now that Biden has taken office, that premium cut may be back on the table. If so, it could help make homeownership more affordable for countless FHA borrowers.

A premium reduction of 25 basis points would mean an annual mortgage premium of 0.85% would shrink to 0.60%. For a $200,000 mortgage, instead of paying $1,700 a year in mortgage premiums, you'd pay $1,200. That savings could help a lot of homeowners cover both their housing expenses and their general bills more easily. And given the number of people who are struggling financially during the coronavirus pandemic, lower mortgage premiums could have a substantial impact.

Of course, right now, Biden is focused on providing immediate relief during the pandemic, and he's already signed a number of executive orders to that effect. But he's also made it clear he seeks to make homeownership more affordable and attainable. Slashing FHA loan premiums is certainly in line with some of his other proposals, including a $15,000 tax credit for first-time home buyers. If Biden lowers FHA loan costs, it could be a huge boost to borrowers who might otherwise shy away from purchasing a place of their own.