The FHA mortgage, a very popular loan option for buyers, has announced the likelihood of higher fees for borrowers wishing to utilize the government backed loans to buy houses.

The Wall Street Journal broke the news late last night in their article about the FHA fees increasing. Thank you to Dan Plunkett of Prosperity Mortgage for sending the WSJ article above, and making me aware of these possible major changes to FHA financing.

The changes have not gone in effect yet, as it isn’t official, and that date is yet to be announced.

Here are the major changes that will affect FHA loan borrowers:

  • Seller contribution to Buyer’s closing costs will be reduced to 3% of the purchase price of the house. (Sellers currently are allowed to contribute up 6%).
  • The upfront Mortgage Insurance Premium (MIP) required on all FHA loans will be raised to 2.25% of the loan amount. (It currently sits at 1.75%).
  • The monthly Mortgage Insurance Premium (MIP) will also increase, though that amount has not been released yet.

The good news is that the downpayment was left alone at 3.5%, as there were discussions of raising that to 5%, making the loans harder for buyers to utilize, with the inability to get more money from the seller for closing cost help.

If this goes through as planned, this is going to make getting an FHA loan much more difficult for many Americans, because the closing cost help from the seller can make the determination as to whether a buyer has enough cash to close at settlement. I have experienced a number of buyers who have gotten more than 3% in closing cost help from the seller, and this would make the houses unattainable for those buyers.

I am worried about what this may do to the housing economy, as FHA loans have become a very popular program due to the low downpayment option and ability of the seller to contribute a decent % of the purchase price back to the buyer to make the house affordable for them.

I will keep you updated as this develops further.