Photo of a damaged house that sold.
FHA loan requirements are about to change. CC by TheTruthAbout.../Flickr

The Federal Housing Administration is exists to help guarantee low income mortgages. To hedge against the possibility of loans going bad, the FHA is legally required to keep 2 percent reserves, but it currently only has about .53 percent. Interest rates on FHA loans will be going up on Sept. 7, but there are plans in place to keep average payments from going up too much.

Bad credit loans through the FHA

Borrowers that need money now for a mortgage but don’t have the best credit usually turn to the FHA for help. FHA loan programs reduce how much has to be put down on a loan. About 3.5 percent of the value of the loan needs to be put down with an FHA loan. A bill that would have required a 5 percent down payment died in the Senate. Currently, about 20 percent of mortgage loans are originated by the FHA.

Reserves required of the FHA

Currently, the FHA could only cover .53 percent of the loans it has guaranteed. According to the federal regulations governing the FHA, they should have 2 percent of their loan amount held in reserve. The FHA has requested to increase the rates to make up this gap. Lawmakers approved this request, saying that the FHA could increase the home insurance mortgage premium by a full percentage point. This change will take effect on Sept. 7, but the FHA plans on phasing in the changes. This change will raise a little more than $3.5 billion per year.

Change in FHA loan payments

The change in the cost of an FHA loan will be relatively small. To offset the amount of money paid over the life of the loan, the FHA will reduce origination fees. Loan origination fees will go from 2.25 percent of the value of the loan down to 1 percent. The final effect is that FHA loan holders will pay about $40 per month more for each month of their loan.

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