Considering an FHA mortgage in Michigan in the near future?  The Federal Housing Administration is making changes that will have an impact on your new home purchase decision.

The Federal Housing Administration (FHA) is attempting to improve its capital reserves by implementing a hike in up-front  insurance premiums that it charges to borrowers.  According to the agency, the hike – which is being upped from 1% to 1.75% of the base loan amount on April 1^st, 2012 – is necessary because plummeting home prices have forced reserves into a new low, down below the level mandated by congress in 2009.

While the average home buyer loves to hear that home prices are falling, it raises red flags with the FHA.  Additional reports from the agency state that if home prices continue to decline, the losses of the FHA could exceed their capital reserves.

“After careful analysis of the market and the health of the [Mutual Mortgage Insurance] fund, we have determined that it is appropriate to increase mortgage insurance premiums in order to help protect our capital reserves and to continue encouraging the return of private capital to the housing market,” said acting FHA commissioner Carol Galante. “These modest increases are one of several measures we are taking towards meeting the Congressionally mandated two percent reserve threshold, while allowing FHA to remain a valuable option for low- to moderate-income borrowers”

What does the cost look like to home buyers?  It’s not exactly significant, especially if approached from the right angle.  Borrowers can roll the increased up-front fee into their mortgage balance.  When the high upfront fee and the .01 point premium increase are combined, a home buyer could expect to add about $5 to their monthly mortgage payment on an FHA loan.

It should also be noted that on June 1 FHA will increase its annual mortgage insurance premium (MIP) by 0.35 percent for loans above 625,000.

The average low to mid-income home buyer may shrug off $5 (that’s less than the cost of a Matinee at Emagine Cinemas) and cheer at dropping home prices in Michigan, but this kind of steady decline in the housing market and hike by the FHA is seen as a bad thing for some.  According to Jaret Seiberg, an analyst with the Washington Research Group, hikes are bad for the housing market.

“Hikes will discourage sales to first time home-buyers by making it more expensive to borrow thereby depriving sellers of potential buyers.”

Details of the rate increases will be published in a Mortgagee Letter to FHA-approved lenders. Borrowers already in an FHA-insured mortgage or Home Equity Conversion Mortgage (HECM) will not be impacted by the pricing changes announced today nor will borrowers in special loan programs which will be outlined in FHA’s forthcoming Mortgagee Letter.

You can read the full press release from FHA here