Costs to increase for FHA loans / LJWorld.com

Business

By David W. Myers

October 3, 2008

The Federal Housing Administration is boosting the cost of its most popular loan-insurance program. The increase will cost many home buyers hundreds or even thousands of dollars.

Q: We started looking for a house to buy in August, and a mortgage broker preapproved us for an FHA loan. We haven't found a home that we like yet, but the broker called us last week to say that FHA loan costs are going to rise. Is this true, or is the broker just trying to rip us off so he can make more money?

A: The broker isn't trying to rip you off. The Federal Housing Administration, commonly referred to as the FHA, is boosting the upfront fees it charges to borrowers who use the program after Oct. 1.

The government-run FHA doesn't loan money directly to borrowers, but instead insures loans for banks and other financial institutions that issue mortgages to buyers who cannot qualify for a traditional home loan. If the buyer later defaults, the FHA's insurance coverage helps to pay for part of the bank's losses.

The agency's reserves are being squeezed at both ends. At one, it's suffering growing losses from the rising number of foreclosures on loans that it has insured before. On the other, demand for its loan-insurance program has hit near-record levels as many borrowers are turning to the FHA program because they cannot qualify for a traditional mortgage.

To shore up its finances, the FHA will boost the upfront premiums it charges to most borrowers to 1.75 percent of the total loan amount on Oct. 1. That's an increase from the 1.5 percent the agency has recently been charging, resulting in a $750 increase for a typical $300,000 loan.

Q: Is hazard insurance the same thing as liability insurance?

A: No. Hazard insurance is primarily designed to provide financial protection in case your home is damaged by fire. Depending on the terms of the insurance policy, it will also pay for repairs if the losses were caused by a storm or other natural causes, or even vandalism.

Conversely, liability insurance provides financial protection for claims arising from injuries or damage to other people or their property. If the mailman breaks his leg on your front porch, your liability coverage likely would pay for his medical costs and at least some of a jury's award if he files a successful lawsuit for his injuries.