FHA Loans are About to get More Expensive

The costs of gas, fuel, and food continue to rise, but the cost of shelter, another one of life’s basic necessities, is a different story. Housing affordability rose to its highest levels in the 20 years since it has been measured, according to the National Association of Realtors composite Housing Affordability Indexand the National Association of Home Builders (Wells Fargo/NAHB) Housing Opportunity Index. 

Essentially, these indices are a measure of the financial ability of US households to buy a home. The two major determining factors of these indices are income and housing cost. Thanks to falling home prices, historically low interest rates, and a strong median household income, the current housing affordability index numbers are the most attractive since tracking began in the early 1970s. A family with the national median income of $61,533 (as reported by the U.S. Bureau of the Census) had almost twice the income needed ($32,308) to qualify for a 30-year fixed rate mortgage at a 4.82 percent interest rate to purchase a median priced single-family home in January of this year, assuming a 20 percent down payment.

However, a 20 percent down payment is not required for the average person to be able to purchase a home. With an FHA loan, your down payment can be as little as 3.5 percent of the purchase price. An FHA loan is a Federal Housing Administration mortgage insurance backed mortgage loan that is provided by FHA-approved lenders. In today’s housing market, FHA loans are a common form of home financing for many households. To obtain an FHA loan, a mortgage insurance premium (MIP) is required, broken down into two types of mortgage insurance: the up front MIP and the monthly MIP.

Although an FHA loan remains an affordable way to obtain a mortgage, it’s about to get more expensive to obtain an FHA loan. Starting April 18, 2011, the monthly MIP will be higher thanks to new premium requirements. How much more expensive? In terms of monthly mortgage payments, assuming a $200,000 loan amount with a 30-year loan and 3.5 percent down payment (the most typical scenario used by borrowers of an FHA loan) the increase will be $33.33 per month. The same loan, the same fixed rate, the same 30-year loan term, the same lender... just more expensive.

Don’t let this increase deter you. With housing affordability at an all time high, it may still be the right time to purchase a new home. The local market in Carroll County is awash with opportunities to find your dream home at incredible prices.

Jamie Walker is a full-time licensed Realtor at RE/MAX Advantage Realty in Westminster, where she grew up and continues to sell real estate Learn more in her profile bio.