FHA Mortgage Insurance Laws

• FHA requires mortgage insurance on certain loans.house image by Earl Robbins from Fotolia.com
  
  Federal Housing Administration (FHA) loans appeal to first time homebuyers because the qualifications are less restrictive than conventional loans. FHA credit guidelines are often more relaxed, and down payment amounts also are lower than conventional loans. However, if you make a down payment of less than 20 percent FHA requires you to carry mortgage insurance on your loan.
  
  

FHA Reform Act of 2010

• Prior to the most current U.S. economic recession, the housing market was booming. When the U.S. went into a deep recession and the U.S. housing market collapsed, many homeowners with FHA-insured loans began defaulting on their mortgages. The Federal Housing Administration began taking huge losses and had to use their capital reserve funds to cover its business losses. These major losses led to the passing of the FHA Reform Act, which governs insurance laws on FHA backed loans.
  
  

Annual Insurance Premium Laws

• The laws in the FHA Reform Act allow the Federal Housing Administration to increase the maximum annual mortgage insurance premiums from 0.55 percent to 1.50 percent. The FHA makes annual insurance premium increases at their discretion and the increases are not mandatory. The premium increases offer more protection against losses for FHA mortgage loans that lenders may have underwritten without adhering to FHA standards, resulting in a large amount of foreclosures.
  
  

Upfront Insurance Premium Laws

• The FHA requires all borrowers with FHA backed loans to pay an upfront insurance premium when they close on the mortgage loan. Under the FHA Reform Act of 2010, the upfront insurance premium will decrease from 2.25 percent to 1.00 percent. The FHA calculates upfront premium amounts by multiplying the upfront premium percentage by the amount of the loan. Under the previous FHA insurance laws, a borrower with $200,000 mortgage would pay $4,500 for the upfront insurance premium. Under the new FHA Reform act laws, that same borrower would only pay $2,000 for the upfront insurance premium.