Generally, private lenders
require borrowers with down payments of less than 20 percent to purchase
private mortgage insurance. It is typically paid for by the borrower and
protects lenders against default. However, mortgage insurance does not protect
the borrower. The Federal Housing Administration (FHA) insures lenders against
losses incurred when borrowers default on their home loans. However, because
the FHA insured nearly 30 percent of all single-family loans—higher than the 10
percent share considered optimal by government officials—the FHA is tightening
its requirements for borrowers with small down payments. This has resulted in
private companies that provide lenders with similar protection against defaults
entering the market.


• Traditionally, the FHA enabled low- to moderate-income borrowers
to put down as little as 3.5 percent as a down payment on a home. Beginning
this month, down-payment requirements on loans insured by the FHA have
increased to 10 percent for borrowers with credit scores below 580. Borrowers
with credit scores of 580 or above still will be able to put down the
traditional 3.5 percent.

ʉۢ Other changes to the FHA mortgage program include increasing the
upfront mortgage insurance premium from 1.75 percent to 2.25 percent and
reducing permissible seller concessions from 6 percent of the loan amount to 3
percent. The FHA also has asked Congress for authority to increase the maximum
monthly insurance fee from the current 0.5 percent level to 1.55 percent.

• Resulting from the more-stringent FHA policies, fewer borrowers
qualify for government-insured mortgages and are turning to private mortgage
insurers, who also have made changes to their borrower requirements. For
example, one private mortgage insurance company now will insure five-percent
down-payment loans to borrowers nationwide. Previously, such mortgages were not
available to borrowers in markets with declining home prices, which included

• Premiums for both private mortgage insurance and
government-insured FHA loans may be tax deductible. Additionally, in most
instances, coverage can be canceled when the borrower’s equity reaches 20
percent of the original loan amount. Borrowers are advised to review both
options to decide which one works best for their situation.

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