FHA (Federal Housing Administration) has been changing guidelines at a much quicker pace recently. While some have been expected, some have not and are causing quite a stir in the mortgage marketplace. It is not surprising at all that FHA mortgages are seeing a drop in purchase applications this month after the increase of the upfront and annual mortgage insurance premiums which are causing FHA mortgages to be more expensive. The upfront mortgage insurance premium, which is now 1.75 percent, is the latest change that is having the greatest impact. On a $200,000 FHA mortgage, the upfront MIP fee is now up by $1,500 and totals $3,500. The annual mortgage insurance premium, which is paid monthly, increased only by .10 percent.

According to the Mortgage Banker's Association, FHA purchase applications for the week ending April 6th decreased 23 percent after heavy demand was seen prior to April. This decrease was the largest drop since May 2010 when the expiration of the first time home buyer tax credit took place. Now that FHA's insurance premiums have increased, many borrowers may be turning back to conforming mortgages for financing. Although higher credit scores are necessary for conforming mortgages, usually 680 and above, it is often the necessary down payment that sends borrowers to FHA. Conforming mortgages require a minimum of 5 percent while FHA mortgages require 3.5 percent. Both loan types require monthly mortgage insurance for any loan that has a loan to value higher than 80 percent. FHA has increased its insurance premium several times in the past three years in order to secure their insurance fund and each time, FHA purchase applications have dropped until consumers got used to the changes and again pursued FHA mortgages. This is especially true for first time home buyers who often need the FHA low down payment options. In the meantime, many will be further cleaning up their credit while saving some additional funds in order to go the conventional mortgage path to avoid paying these higher fees.

It was inevitable that FHA mortgages would see a drop in purchase applications at the start of the increase of the upfront mortgage insurance premium to 1.75 percent. From this point on, it will be interesting to see how long this continues and if it has any long term impact on FHA originations. For FHA, which never had such a large share of the mortgage business years ago, it may be a way to return to the past.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.

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