At the beginning of the year there was good news for lower-income borrowers. Previous secretary of Housing and Urban Development, Julian Castro, announced on Jan. 9 that there would be a reduction on the annual mortgage insurance premium. This would have affected new loans insured by the Federal Housing Administration that closed by Jan. 27.
According to Realtor.com, “For the typical FHA borrower, that would amount to just over $500 per year, or about 1% of the median household income.”
This last-minute action by the Obama administration was reversed by President Trump. This reversal will mean that more potential buyers will face higher costs. On Jan. 20, it was announced that the 0.25 percentage point reduction would be suspended indefinitely.
First of all, what is the FHA?
The Chicago Tribune sums it up:
“The Federal Housing Administration is a government agency that insures home loans and collects fees from borrowers to reimburse lenders in the case of default. It is part of the Department of Housing and Urban Development, and the loans FHA insures are aimed at first-time homebuyers and those with poor to fair credit.”
The FHA offers more lenient credit requirements and allowing down payments as low as 3.5% for millions of homeowners. According to CNN, “FHA loans are attractive to borrowers with lower credit scores, or those who don’t have the traditional 20% down payment in savings. But the premiums, coupled with recently rising home prices, can make the monthly payments high.”
You might be thinking that 0.25 is such a small percentage that it would not even affect the average FHA borrower. However, this reduction could have saved borrowers about $500 per year according to the FHA. Borrowers with large home loans would have seen an even bigger cut in their premium rate.
There were many who were displeased with the sudden reversal. Senator Chuck Schumer called the reversal a “terrible thing to do to American homeowners.” Schumer went on to explain how it would negatively affect borrowers:
“In one of his first acts as president, President Trump made it harder for Americans to afford a mortgage by reversing a recent decision by the Department of Housing and Urban Development to reduce annual insurance premiums that many borrowers pay.”
What does this mean for you?
If you are a potential homeowner and were planning to use an FHA-backed loan, you will be required to pay the same premium rate for mortgage insurance as you would have in January 2015. This cut could have saved you hundreds of dollars a year.
However, there are some who believe that while the original cut would have created a higher demand for new houses, it could lead in the right direction. According to The New American,“It is also questionable whether this artificial reduction in interest rates and in mortgage insurance is really beneficial to the potential home buyer. After all, without the artificial increase in demand, home prices would be lower. When these misguided government policies drive up prices of homes, the predictable solution by those in government is to call for more subsidies, which only drive the prices up even more. And the cycle continues.”
When the cut was initially announced, the Obama administration argued that the previous $1.7-billion bailout which was given in 2013 to cover the potential losses on the large volume of low-down-payment mortgages FHA insured from 2007 to 2009 helped the agency to improve.