The Federal Housing Administration plans to lower its annual mortgage insurance fees by 0.5 of a percentage point—a move that it says will allow more buyers to jump into the real estate market.
“This action will make home-ownership more affordable for over 2 million Americans in the next three years,” says Julián Castro, secretary of the Department of Housing and Urban Development.
According to the White House, the change will save the average borrower about $900 a year. The lowered premiums will help more than 800,000 homeowners save on their monthly mortgage costs and create up to 250,000 new home buyers, the Obama administration says.
The FHA doesn’t make its own loans, but insures mortgages made by lenders. Borrowers pay for that insurance through yearly premiums, which have risen to 1.35 percent of the loan balance, to make up for losses suffered when mortgages went bad during the housing crash. The premiums now will be lowered to 0.85 percent. While that’s higher than the 0.55 percent charged before the crash, it is expected to ease the way for many low- and moderate-income buyers who choose FHA loans because they allow for down payments as low as 3.5 percent, plus lower credit scores.
It will make home-ownership possible for a slightly expanded group of home buyers.
The FHA probably was responding to pressure from the National Association of Realtors and other groups that promote home-ownership, as well as to an announcement last month by Fannie Mae and Freddie Mac that they will back certain mortgages requiring only a 3 percent down payment. The two mortgage finance companies require a 5 percent minimum down payment on most of the products they guarantee.
With the Fannie Mae and Freddie Mac offerings, FHA stands to lose part of its business. Lowering the annual insurance premiums is a way to better compete for that group of borrowers.