FHA to Raise Fees and Down Payments

Here is another piece of news that shows that the real estate market has still not regained its health:

I read that the FHA (Federal Housing Administration) is planning to raise fees and increase down payments for certain borrowers.

As a little background, the FHA doesn't issue mortgages, but insures them. Up until a few years ago, FHA-backed loans only accounted for about 3% of the mortgage market.

Since then, they have accounted for 30% of all new loan activities, because they have become one of the only options for home buyers with low incomes and/or poor credit. They only require a 3.5% down payment.

While they probably helped slow down the real estate free-fall, the problem is that about 9% of their borrowers are three or more months behind on their payments, and their default-rate is skyrocketing.

This has pushed the FHA's capital reserve funds to less than 2% of outstanding loans (which is the minimum threshold required by Congress).

As a result, the FHA is implementing two changes:

1. The upfront charge to borrowers for insurance will rise from 1.75% of the loan to 2.25%. The monthly insurance premiums won't change.

2. Borrowers with a FICO score below 580 won't qualify for the 3.5% down payment. They will have to put down 10%.