The cost of government insured mortgages (FHA Financing, which stands for Federal Housing Administration) will be more expensive for homebuyers as FHA raises their insurance rates and tightens the credit score requirement.

The current 1.75% Up Front Funding Fee (this is a fee FHA charges to insure the loan) FHA charges to insure mortgages will rise to 2.25% on April, 5, 2010.  So if your loan is $300,000, you will pay $6750.00 in upfront fees—which can be rolled into the loan.

Borrowers who have credit scores below 580 will be required to bring in a down payment of 10%, up from the current 3.5% and the allowable seller credit/concessions (money for closing costs) will be reduced to 3%.

FHA guarantees almost one-third of loans used to purchase homes, they are struggling with a 14% delinquency rate after taking on more risk to salvage the housing market when private sectors evaporated. Due to FHA’s reserve fund dropping to its lowest level in history (little money to lend out to the borrowing public), the last fiscal year borrowers will bear more of the costs for government insured programs by charging higher premiums. The additional revenue will help ensure that FHA will stay solvent.

In addition to the Up Front Funding Fee premium increase FHA plans to ask Congress for permission to increase the separate annual premium of .55%. This is a monthly charge above and beyond your payment (based on the loan amount).  So your payment on a $300,000, would be an extra $137.00 a month.  They anticipate this change in the summer of 2009.

FHA is also reducing the amount of seller credit to homeowner’s for closing costs to 3% of the purchase price instead of the current 6%.

Although FHA has raised the minimum credit score requirement from 500 to 580 many lenders require their minimum FICO score to be 640.