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The housing crisis continues to take its toll on the insurance fund that had been set aside to cover losses in the FHA mortgage loan portfolio. A recent audit indicated that the capital ratio, which is the ratio of economic value to insurance in force, had declined to .24% - far below the congressionally mandated level of 2%. Earlier this year, the FHA restructured mortgage insurance premiums on newly originated FHA loans in an effort to build reserves, but continued defaults and losses combined with an increase in the amount of FHA insured loans has stymied those efforts.

Currently, most borrowers using an FHA home loan pay an up-front mortgage insurance premium of 1% of their loan amount at closing, a fee which is usually added to their loan amount. In addition, the borrower will also pay an annual mortgage insurance premium of up to 1.15% of the loan amount as part of their monthly payments. This premium is essentially being used to offset losses incurred on existing loans that have not performed.

Proposals that have been floated to address the shortfall are a further increase in credit requirements, higher minimum down payments, and increased mortgage insurance premiums.

It is unlikely that increased premiums will go into effect before 2012, but home buyers should be aware of increased borrowing costs that may be around the corner. Taking advantage of today’s discounted home prices and near record low rates can make a lot of sense for many home buyers.