FHA Loan Costs to Increase

The Federal Housing Administration will raise prices and it will cost more money to get an FHA loan in 2010.

- The upfront increase will mean an extra $500 per $100,000 borrowed.
- Congress must still OK an increase in the annual premium.
- Premiums are going up to offset FHA losses on the housing market.

It's bad news for the 30 percent of borrowers who get FHA-insured mortgages. The FHA loan is popular because its minimum down payment is 3.5 percent, whereas most conventional loans require a down payment of at least 10 percent.

The FHA isn't a lender. Instead, it insures mortgages. If you get an FHA-insured mortgage and then default on it, the FHA reimburses the lender for financial losses. As the borrower, you pay for the insurance, even though the lender is the beneficiary. You pay for FHA insurance in two pieces: an upfront premium and an annual premium. The FHA will raise the upfront premium this spring, and will ask Congress for permission to raise the annual premium later.

And the agency will require a credit score of at least 580 to qualify for the FHA's 3.5 percent down payment program. A borrower with a lower credit score would have to come up with a down payment of at least 10 percent. This change won't have much effect, because most lenders require a credit score of 620 or 640 for FHA borrowers, anyway.

By Holden Lewis - Bank Rate