Despite Pressure, FHA Mortgage Insurance Costs Remain High

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FHA borrowers may not be in line for a break on their mortgage costs.

To buy a home, you'll generally need to come up with some sort of down payment (unless you qualify for a VA loan, where you can get away with putting 0% down). Conventional mortgage lenders will often require you to make a 20% down payment on your home, though some will accept less at closing.

But if you're really limited in how much you can put down on a home, an FHA loan may be a better option. FHA loans are backed by the Federal Housing Administration, which is part of the Department of Housing and Urban Development (HUD). With an FHA loan, you can buy a place of your own with as little as 3.5% down. FHA loans are also a good bet for buyers with lower credit scores. You can qualify for an FHA loan with a score of just 580. For a conventional mortgage, the minimum credit score is 620, and some lenders have credit score requirements even higher than that.

FHA loan fees can be costly

There's just one downside to getting an FHA loan -- you'll be charged an upfront fee for that loan, as well as ongoing fees. Initially, you'll be on the hook for a 1.75% mortgage insurance premium at closing. On top of that, you'll pay a monthly premium ranging from 0.45% to 1.05% of your loan, depending on the specifics of your loan itself.

Why those fees? The FHA takes on a certain amount of risk in backing mortgages. So mortgage insurance premiums help the agency absorb some of the risk of a borrower defaulting on a home loan. It's the same concept that applies to private mortgage insurance for conventional loan borrowers who don't put down 20% at closing. The insurance premiums borrowers pay are extra money that goes into lenders' pockets. That way, if a borrower defaults, that lender is out less money.

Earlier this year, President Joe Biden sought to get HUD to lower FHA mortgage insurance premiums by 25 basis points. (Basis points describe changes in mortgage interest rates on a small, precise level. One hundred basis points equal 1%. So 25 basis points is one quarter of 1%.) That change would make these home loans more affordable for borrowers. But now, it looks like mortgage insurance premium costs are staying put, and borrowers won't get a break after all.

HUD holds firm

This week, HUD Secretary Marcia Fudge made it clear that the agency will not, in fact, be reducing the cost of mortgage insurance premiums. As such, that 25 basis point cut is off the table.

Now, FHA mortgage insurance premiums not going down isn't great news for borrowers. But FHA loans are still a relatively affordable option for prospective buyers who don't have a lot of money to bring to closing, so even though premiums are holding steady, you shouldn't necessarily be deterred. FHA loans are extremely forgiving for borrowers with poor credit. That alone makes looking into FHA lenders a valuable option for buyers who aren't in the strongest position to buy a home, but want to buy and feel they can afford it.

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