Effective April 1, 2013, the Federal Housing Administration (FHA) has increased mortgage insurance premiums. And on June 3, 2013, the agency will institute stricter guidelines and longer durations on required insurance for FHA insured loans.

The FHA, which is a government agency, insures approved mortgage lenders to protect them against losses when homeowners default on their mortgage loans. In the event that a homeowner defaults, the FHA pays a claim (up to 20% of the mortgage value) to the lender. However, for lenders to qualify for this insurance, loans must meet criteria set up by the FHA.

These new FHA changes are being made to increase the agency’s insurance fund reserves. At the end of 2012, this fund had a $16.3 billion deficit due to the high number of foreclosures that occurred during the economic downturn.

Mortgage Insurance Premium Increase

Effective April 1, the FHA increased monthly mortgage insurance premiums by 10 basis points or a 0.1 percentage point for most new mortgages, and by 0.05% for mortgage loans of $625,500 or more.

Duration of FHA Mortgage Insurance

Effective June 3, for loans with less than 10% down, the FHA will no longer cancel mortgage insurance premiums when a borrower has repaid 22% of the loan’s principal, or in other words, 78% of the original loan amount. As a result, borrowers will be required to pay mortgage insurance (based on the unpaid balance) for the full lifetime of the loan or as long as they keep it.

Other Changes

Effective June 3, mandatory manual underwriting will be required on applications by borrowers with credit scores below 620 and debt-to-income ratios exceeding 43%.

Down payment requirements for loans above $625,500 will increase to 5% effective June 3.

The FHA will increase enforcement efforts with FHA-approved and non-FHA-approved lenders who make false advertising claims regarding the requirements borrowers must meet to acquire a new FHA loan following a foreclosure. For borrowers who have experienced a foreclosure and wish to obtain a new FHA-insured loan, they must wait three years after their foreclosure before they can apply for a loan; they must have re-established good credit; and they must meet all FHA underwriting requirements in order to qualify for a loan.

If you’re looking to obtain a new mortgage loan, contact the specialists at Grandview Lending. In light of these FHA changes, we can help you compare an FHA-backed loan versus conventional mortgages with private mortgage insurance to see what may be a better loan option based on your situation.