WASHINGTON — Homebuyers considering a government-insured mortgage should make extra room in their budgets.
In an effort to reduce a potential budget shortfall, the Federal Housing Administration (FHA) will require homeowners to pay a monthly insurance premium for a longer period. This follows a decision this year to raise the premiums for all borrowers, the fifth such increase since 2009.
Although the increase should bolster the agency’s bottom line, it will make things more expensive for borrowers who depend on FHA-insured mortgages.
The insurance premium that buyers pay in addition to their monthly mortgage payment usually expires once 22 percent of the principal loan is paid. Now, all new borrowers will have to pay the premium for at least 11 years and up to the entire duration of their mortgage, according to the rule that went into effect Monday.
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The difference could mean years of paying hundreds of dollars extra a month, depending on the size of the loan.
Premium amounts are calculated as 1.35 percent of the annual unpaid loan balance. For example, a $100,000 mortgage would have an annual premium of $1,350 in the first year, which would be charged on a monthly basis as part of the mortgage payment.
“This is going to hit hard in low-income and middle-class neighborhoods,” said John Settles, a mortgage consultant with Wells Fargo, of the new rule.
The government insurer backs more than $1 trillion in loans, or nearly 14 percent of the mortgage market. It is considered an affordable option for new buyers, especially those who cannot afford a high down payment or have a less-than-stellar credit history.
But there has been concern that the FHA, facing growing losses from mortgage delinquencies, might need a taxpayer bailout. Earlier this year, President Obama’s budget estimated the FHA’s deficit could reach $943 million.
The amount raised from premium increases and other measures have not been enough, and the agency faces a shortfall of more than $5 billion, FHA Commissioner Carol Galante said in written testimony before a Senate subcommittee Tuesday.
Settles said his clients were “upset, confused and frustrated” when he explained the new rules.
“I told them: ‘Nothing has changed about your situation, but if you buy the same house that you were planning to a month ago, it’s going to cost you more,’ ” he said.
The changes come at a tough time for many buyers, who are competing for a small inventory of homes amid surging prices. Buyers can opt for conventional mortgages, but they typically require higher down payments, and many lenders are less forgiving of blemished credit histories.
Blake Warenik and his fiancée are shopping for their first home. They had their eye on a condominium unit in a Washington, D.C., suburb, but were unpleasantly surprised to learn the new rule could mean an extra $200 per month for an FHA loan.
“Two hundred dollars a month is quite a lot to add on top of what’s already a high mortgage payment in this city, as well as utilities, transportation and condo fees,” said Warenik, 29.