Generally, private lendersrequire borrowers with down payments of less than 20 percent to purchaseprivate mortgage insurance. It is typically paid for by the borrower andprotects lenders against default. However, mortgage insurance does not protectthe borrower. The Federal Housing Administration (FHA) insures lenders againstlosses incurred when borrowers default on their home loans. However, becausethe FHA insured nearly 30 percent of all single-family loans—higher than the 10percent share considered optimal by government officials—the FHA is tighteningits requirements for borrowers with small down payments. This has resulted inprivate companies that provide lenders with similar protection against defaultsentering the market.

KEEP THIS IN MIND

• Traditionally, the FHA enabled low- to moderate-income borrowersto put down as little as 3.5 percent as a down payment on a home. Beginningthis month, down-payment requirements on loans insured by the FHA haveincreased to 10 percent for borrowers with credit scores below 580. Borrowerswith credit scores of 580 or above still will be able to put down thetraditional 3.5 percent.

 • Other changes to the FHA mortgage program include increasing theupfront mortgage insurance premium from 1.75 percent to 2.25 percent andreducing permissible seller concessions from 6 percent of the loan amount to 3percent. The FHA also has asked Congress for authority to increase the maximummonthly insurance fee from the current 0.5 percent level to 1.55 percent.

• Resulting from the more-stringent FHA policies, fewer borrowersqualify for government-insured mortgages and are turning to private mortgageinsurers, who also have made changes to their borrower requirements. Forexample, one private mortgage insurance company now will insure five-percentdown-payment loans to borrowers nationwide. Previously, such mortgages were notavailable to borrowers in markets with declining home prices, which includedCalifornia.

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

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