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Who will benefit from the reduced cost of FHA loans?

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Two for sale signs — one hanging from a white post, the other posted on a grey chainlink fence — are seen in the green grassy yard of a single-story, Spanish-style home, with white stucco and red clay roof shingles.

The lowered insurance premium could mean savings of between $600 to $1,000 a year, depending on the size of your loan. Joe Raedle/Getty Images

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It will soon be a little cheaper for many low- and middle-income people — and first-time homeowners — to buy a house. 

The Biden administration just announced that it’s lowering rates on the mortgage insurance people have to pay when they take out a loan backed by the Federal Housing Administration.

Lenders look at three main things when deciding whether to give you a mortgage:

“One is, do you have enough income to cover the monthly mortgage payment? Second, do you have enough savings to pay for the down payment? And third, is your credit score good enough that you can qualify for a mortgage?” said Jenny Schuetz at the Brookings Institution.

If you don’t have all three, she said it can be hard to become a homeowner — but not impossible if you apply for a mortgage backed by the Federal Housing Administration.

“FHA tends to target households who are sort of on the margin on often all three of those categories,” Schuetz said.

If you have a fair amount of debt or a low credit score, it’s harder to get a conventional mortgage, though you might have a better chance at an FHA-backed loan. If you go that route, you’ll also be required to get mortgage insurance, which adds to your total monthly payment.

This change will reduce that insurance premium by maybe $600 to $1,000 a year or so, depending on the size of your loan.

“This isn’t going to make the difference for somebody who has no money to pay for a down payment or somebody who really can’t afford the mortgage payment,” Schuetz said.

“But if you’re sort of on the margin,” then she added that saving $50 or $100 a month might make the difference between being able to buy and not being able to buy.

That’s especially true for low-income and first-time buyers in less expensive housing markets. 

“Every dollar makes a difference,” said David Dworkin with the nonprofit National Housing Conference. “While $1,000 a year may not seem like a lot, it has an impact in two ways. One is that there’s more money to support your basic expenses and to repair things that go wrong in a house.”

And two: It may also help some people qualify for a mortgage in the first place. “Because we’re also looking at how much you’re paying for your housing expenses compared to how much you earn, and that $1,000 a year can help with that calculation,” Dworkin said.

Which means, Dworkin added, more people should be able to become homeowners as a result of this change.

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