FHA Loan Down Payment Rules and Regulations

The home loan landscape has evolved over the past few years. Matters concerning Federal Housing Administration, or FHA loan down payment. however, have not changed much. True, certain types of borrowers will be affected by a politically motivated rules change, and the mortgage insurance premium (MIP) associated with FHA loans has bumped up a minuscule amount. By and large, though, the average borrower should find that FHA loan down payments will be business as usual

More of the Same for Most

The overwhelming majority of FHA loans are given to low- and middle-income home buyers, who purchase houses that average under $200,000. These individuals have nothing to worry about when it comes to FHA loans. Requirements for FHA loan down payments for the average borrower remains stable, at 3.5 percent.

The group that will see a change are those looking to borrow $625,000 or more--who, studies have shown, account for fewer than one percent of all FHA borrowers. Action taken by the United States Department of Housing and Urban Development (HUD) in 2013 raised the down payment on FHA loans exceeding that amount to five percent. Officials in the nation's capital wanted to stabilize FHA loan down payments for the low- and middle-income borrowers while still making such borrowing available to those buying more-expensive houses. The latter simply comes at a slightly higher price regarding down payments.

It should be noted that housing typically costs more in large, big-city markets. Therefore, even some middle-income buyers in places such as New York City, Los Angeles and Washington, D.C., may be affected by the FHA loan down payment increase, depending on the price tag of dwellings in their area.

A Word About Insurance Premiums

While FHA loan down payments have, for all intents and purposes, have remained the same, there have been changes afoot, zeroing in on mortgage insurance premiums (MIPs). MIPs on FHA loans come in two parts: a premium that is paid upfront (or wrapped into the loan) when the loan closes, and an annual premium that's divided by 12 and added to the monthly mortgage payment.

A hike of approximately .1 percent was applied to the annual MIP starting April 1, 2013. Both those borrowing less and more than $625,000 felt the ever-so-slight pinch. Those who make an FHA loan down payment of 3.5 percent, which is most borrowers, pay 1.35 percent on the annual MIP. Ponying up more than five percent down on their FHA loan can decrease borrowers' annual MIP rate to 1.3 percent. Loans in excess of $625,000, on which the required down payment is five percent, pay 1.5 percent. The upfront MIP rests at 1.75 percent across the board, no matter the loan amount.

The Effect on Reverse Mortgages

The mortgage insurance premium rate for reverse mortgages work differently than they do for traditional "forward" mortgages. They are based on what's called a "maximum claim amount," which is tied to the value of the property, instead of being based on the original loan amount, which for many could be zero. Reverse mortgage borrowers can get a lump sum at closing, but many choose a credit line or monthly payments. Reverse mortgage balances increase over time, with the interest and mortgage insurance being added to the balance. Depending on how much of the maximum allowable loan amount the homeowner chooses to borrow, the upfront MIP is either .5 percent or 2.5 percent. The government really wants to discourage people from extracting every last cent form their home equity in the first year, because the risk of running our of money or foreclosure is high. In addition to the upfront MIP charges, an annual MIP is assessed on the loan balance, and this charge is 1.25 percent of the mortgage balance.

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