The up-front mortgage insurance premium for FHA loans recently increased from 1% to 1.75%, but borrowers may not have to shoulder the full weight if a new bill that’s being floated in Congress comes to pass.
The revised premium was implemented as a way to supplement the FHA’s capital reserves, on which the mortgage crisis has taken a hefty toll, but the extra 0.75% is not a negligible amount — for a $200,000 mortgage in Ohio, for example, it works out to an extra $1,500.
For first-time homebuyers who are attracted to the FHA’s low downpayment program, this is a big negative. By adding 1.75% to the starting loan balance, first-time buyers using the FHA’s 3.5% downpayment program cede half of their home equity to the FHA before ever moving in.
Enter the Homeownership Preservation Education (HOPE) Act.
Under a proposal in Congress, HOPE would provide a 0.25% reduction on the FHA up-front mortgage insurance premium to first-time homeowners opting to complete a HUD-approved housing counseling course. The theory is that the HOPE training would give borrowers a financial incentive to education themselves, which would then make them less likely to default.
Long-term, HOPE is expected to reduce FHA foreclosures.
For borrowers who don’t want to wait for the bill to get passed, there are other loan options to consider. Conventional loans, which typically require a 5% downpayment, have no FHA upfront mortgage insurance premium, and the Fannie Mae Homepath program requires just 3% down and no mortgage insurance at all. Homepath has other eligibility requirements.