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Why does FHA Mortgage Insurance exist?
Unlike conventional
loans that adhere to strict underwriting guidelines, FHA-insured loans
require very little cash investment to close a loan. There is more
flexibility in calculating household income and payment ratios. The
cost of the mortgage insurance is passed along to the homeowner and
typically is included in the monthly payment. In most cases, the
insurance cost to the homeowner will drop off after five years or when
the remaining balance on the loan is 78 percent of the value of the
property -whichever is longer.
How is FHA funded?
FHA is the only
government agency that operates entirely from its self-generated income
and costs the taxpayers nothing. The proceeds from the mortgage
insurance paid by the homeowners are captured in an account that is
used to operate the program entirely. FHA provides a huge economic
stimulation to the country in the form of home and community
development, which trickles down to local communities in the form of
jobs, building suppliers, tax bases, schools, and other forms of
revenue. [FHA]
In
the wayback, when the newly married us were buying our first
home, my
dad jokingly offered that the FHA insurance fee was something of a
gummint money making scam. The default rate on FHA loans (going
back
to 1933) was so low that administration fees alone cost more than
any
payout. Of course that was long before Bill Clinton, Barney
Frank,
and Chris Dodd became the nation's banking engineers.
Fast forward.
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For
the first time in its 78-year history, the 100 percent taxpayer-backed
Federal Housing Administration is projected to run out of its remaining
$4.7 billion financial reserves and trigger an infusion of funds from
the Treasury.
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