The Federal Housing Administration (FHA) is an agency of the government that backs loans to first time home buyers. This is to encourage lenders to qualify buyers using less restrictive measures than those who are applying for conventional loans. The FHA does not require the same down payment percentage as conventional loans nor is the credit score standard set as high. Still, if your down payment is less than 20% you will be required by the FHA to carry mortgage insurance.
There are laws that govern the lending practices of the FHA. The FHA Reform Act allowed the FHA to increase the maximum annual mortgage premiums charged from 0.55% to 1.50%. The increase in premiums for mortgage insurance is made periodically by the FHA and is not a mandatory increase. These annual premium increases are made at the discretion of the FHA. They are necessary because some lenders may have underwritten loans that do not strictly adhere to FHA standards. When this happens a lot, foreclosures are the result.
Another law passed is the FHA Reform Act of 2010. Before the years 2007 and 2008 the economy and the housing market were in full swing. Then a recession hit and the housing market in the United States collapsed. Home owners began defaulting on their loans as they were stretched financially to make their payments. A vast number of people were facing unemployment. This was because they were working at jobs that were not risky before the recession. The result of the increase in unemployment was an increase in the numbers of loans that were in default. The FHA had a large percentage of home owners default and suffered huge losses. When the losses were paid from the capital reserve funds the funds became depleted. All these losses were the basis of the FHA Reform Act which changed how loans that are backed by the FHA were handled.
One of the mandates of the FHA Reform Act of 2010 dealt with the upfront mortgage insurance premium paid by FHA qualified borrowers. The upfront mortgage insurance premium is the percent of the premium that is required to be paid at the time of closing on the loan. Under this Act the premium will decrease to 1.00. Before the Act the percent required was 2.25%. The upfront mortgage insurance premium amount is determined by multiplying the total loan amount by this percentage. Here's an example: Prior to the Act a $200,000 mortgage would have a premium payment of $4,500 due at closing. With the passage of this Act, the premium has been decreased to $2,000.
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