FHA borrowers now pay higher fee on mortgage
The Federal Housing Administration is boosting the cost of its most popular loan-insurance program. The increase will cost many home buyers hundreds or even thousands of dollars.
Q. We started looking for a house to buy in August, and a mortgage broker preapproved us for an FHA loan. We haven't found a home that we like yet, but the broker called us last week to say that FHA loan costs are going to rise. Is this true, or is the broker just trying to rip us off so he can make more money?
A. The broker isn't trying to rip you off. The Federal Housing Administration, commonly referred to as the FHA, is boosting the upfront fees it charges to borrowers who use the program after Oct. 1.
The government-run FHA doesn't loan money directly to borrowers, but instead insures loans for banks and other financial institutions that issue mortgages to buyers who cannot qualify for a traditional home loan. If the buyer later defaults, the FHA's insurance coverage helps to pay for part of the bank's losses.
The agency's reserves are being squeezed at both ends. At one, it's suffering growing losses from the rising number of foreclosures on loans that it has insured before. On the other, demand for its loan-insurance program has hit near-record levels as many borrowers are turning to the FHA program because they cannot qualify for a traditional mortgage.
To shore up its finances, the FHA boosted the upfront premiums it charges to most borrowers to 1.75 percent of the total loan amount on Wednesday. That's an increase from the 1.5 percent the agency has recently been charging, resulting in a $750 increase for a typical $300,000 loan.
Q. Is hazard insurance the same thing as liability insurance?
A. No. Hazard insurance is primarily designed to provide financial protection in case your home is damaged by fire. Depending on the terms of the policy, it will also pay for repairs if the losses were caused by a storm or other natural causes, or even vandalism.
Conversely, liability insurance provides financial protection for claims arising from injuries or damage to other people or their property. If the letter carrier breaks his leg on your front porch, your liability coverage likely would pay for his medical costs and at least some of a jury's award if he files a successful lawsuit for his injuries.
Q. I agreed to sell my home last month. As part of the contract, I agreed to provide the buyer with a $7,000 credit when the deal closes to help pay for her mortgage points and other closing costs. The preliminary closing statement I received last week says her closing costs will total only about $5,500, but the lender will not let me give her a check for $1,500 to make up the difference. What can I do now?
A. Many sellers in areas where prices have dropped are now offering to pay part of a buyers' closing costs. It's often a wise marketing decision that can make a house sell faster, in part, because it can reduce the amount of hard cash a buyer must have in order to complete a purchase.
As the banking crisis deepens, however, a growing number of lenders have begun to prohibit their homebuyers from accepting a seller's credit that exceeds the amount of the buyer's actual closing expenses. Some lenders also require that any seller-paid closing credits be used to cover a buyer's one-time-only, "nonrecurring" costs - such as upfront loan fees or title insurance - rather than "recurring" fees, such as hazard or mortgage insurance that must be paid annually until the mortgage is retired.
Because the bank won't let you make up the $1,500 difference by writing a check to your buyer, the simplest solution may be to simply drop the price you originally agreed to by an equal amount.
To illustrate, let's say you have agreed to sell your home for $250,000 and that you have also agreed to give the buyers a $7,000 closing credit. Because the buyers' closing costs will be only $5,500, you could simply amend the sales contract to reduce the price to $248,500 and the credit to $5,500 - thereby making up for the $1,500 difference.
Such an arrangement should satisfy the bank's requirement that your seller-paid closing costs ($5,500) do not exceed the buyer's own closing expenses. It would also let your buyer complete the transaction without scrambling for extra cash at the last minute, while still allow you to reap the same profit you would if the terms of the first contract were left untouched.
Discuss your options with your real estate agent or a local real estate attorney.
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© 2008, Cowles Syndicate Inc.