The Federal Housing Administration recently announced that they are implementing some new policy changes to their FHA lending guidelines. With the continual plan to still provide an affordable mortgage product, the FHA is confident and hopeful that these new changes should support the housing market recovery, strengthen the FHA’s capital reserves, and start eliminating the risk of defaults. These new FHA proposed changes are probably the most major steps the agency has ever taken to address the risk factor. Since banks began tightening their lending guidelines and the sub-prime lending market disappeared, the demand for government insured mortgages greatly increased.
Financing with an FHA home loan has risen with considerable popularity, for it is one of the few ways a person can still purchase a home with very little out of pocket expense.
There are numerous plus’ financing with an FHA mortgage: the FHA loan is federally guaranteed if the borrower defaults, only 3.5% is needed as a down payment, and credit scores can be lower.
The FHA program still remains the largest originator of home financing products for under served communities, but obtaining an FHA is about to become a little more expensive and difficult. Due to the fact that the FHA has been faced with losses because of a weak housing market, the Federal Housing Administration will be making three (3) major changes.
Increasing the up-front insurance premium (MIP) to equal 2.25% of the loan amount. This will be increased .50 basis points from the current premium of 1.75%. Thus allowing for the capital reserves to increase with less impact on the consumer because the annual MIP is paid over the life of the loan instead of up-front at the time of closing.
The next item to be adjusted will be the amount of seller concessions permitted. Currently, FHA allows for up to 6% sellers concessions (closing costs paid by the seller on behalf of the buyer). In keeping with current industry standards, the new allowable amount for seller concessions will be a maximum of 3% of the property’s assessed value.
The third change comes in the nature of credit scores. A new borrowers looking to purchase a home will need a credit score of 580 or higher to qualify for FHA’s 3.5% down payment. For those borrowers with less and a 580 credit score, the amount needed to put down will be a proposed increase of 10% of the purchase price. In reality, today, most lenders are already requiring at least 620 FICO score to quality for FHA’s 3.5% down payment. This credit score increase will allow the FHA to balance its risk factor and continue to provide mortgages to the borrowers that have performed well in the past.
To help protect the FHA and limit loan defaults, they will be increasing their monitoring and enforcing actions in hopes that lender’s are adhering to FHA standards. The Department of Housing and Urban Development (HUD) is also looking to pass legislation that would allow them to hold lenders directly accountable for the mortgage loans they have originated.
The new guidelines pertaining to FHA mortgage’s will begin this spring through the summer of 2010.
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