FHA Changes and How They Will Affect You

The Government continues to tighten regulations on the Federal Housing Administration (FHA) implementing new legislation involving higher costs and stricter guidelines geared to keep FHA solvent.  While these new rules are still in a formulation process, these changes are expected to take effect as soon as next month.

FHA loans allow borrowers a more flexible avenue for Mortgage Lending, with lower credit score requirements and cash reserves needed to close.  As the economy is still reeling from bad mortgage loans, a sluggish housing market and high unemployment rates, FHA has become the primary source for first time homebuyers and for those who do not have the higher down payments and credit scores needed to go with Conventional Financing.

In order to cover the higher risk of these loans, FHA charges a one time upfront fee and a monthly fee to pool into one large insurance fund.  This fund is then used to secure and cover any default mortgages.  As of midyear of 2010, Capital Reserves for the FHA program are down to $3.5 Billion from $19.3 Billion in September of 2008.  Concerned with the loss of $15.5 Billion in available capital reserves, Congress has implemented new initiatives to prevent the need for taxpayer bailouts, as well as strengthening FHA’s overall credit portfolio.  While these new efforts by Congress are seen as the necessary direction needed to keep FHA solvent, many are concerned that these changes will stifle an already depressed housing market.

What does this mean for you?

Higher Monthly Fee’s:  FHA will raise the monthly MIP (Mortgage Insurance Premium) Fee from .55% to .9% initially; with plans to raise it as high as 1.5%.  The loan balance is multiplied by the MIP percentage and divided into 12 monthly payments.  On a $150,000 loan, this will potentially raise your monthly payment by $44 initially; $119 if or when Congress settles on 1.5%.

While the monthly MIP is increasing, Congress has decreased the Upfront MIP Fee from 2.25% to 1%.  This change will allow consumers to finance less money and thus lower their overall amortized payments.  Using the same example of a $150,000 purchase, consumers would finance $1875 less with this new change.  However, coupled with the monthly MIP increase, total overall payments will still increase.

These MIP initiatives project to generate $300 Million per month towards the FHA capital reserves, allowing it to replenish its funds much faster than under previous legislation.

Credit Score Requirements:  Since its inception, FHA has never placed a restriction on Credit Score Requirements, despite individual Lenders previously doing so.  New proposals require a minimum of a 500 credit score for FHA to insure the mortgage and a 580 to keep the Down Payment requirement at 3.5% of the Purchase Price.  Borrowers with credit scores under 580 will have to increase their Down Payment to at least 10%.

This change however, will not affect most consumers.  Lenders have long since placed their own credit score restrictions on top of FHA loans, usually requiring a 620-640 minimum.  Compared to Conventional requirements of 740 credit scores, FHA will still remain a flexible option for homebuyers.

Reducing Seller’s Concessions: Seller’s Concessions are a set percentage of the purchase price (represented in a dollar amount) that the seller agrees to contribute towards the closing costs.  These concessions will be financed into the mortgage and paid out of the Mortgage Proceeds to the Seller.  FHA currently allows 6% of the Purchase Price to be financed into the Mortgage and paid on behalf of the buyer.  New legislation will curtail Concessions to 3%, in an effort to avoid over inflation of home values in order to cover the contributions.

The reduction of Seller’s Concessions from 6% to 3% will affect homebuyers whose cash flow is tight to begin with.  In our example, the loss of 3% on a Purchase of $150,000 will yield $4500 less in Concessions available for the homebuyer.

While these changes will make it more difficult for the homebuyer, it should not affect too many consumers in their goal of homeownership.  However, higher monthly payments and less financial assistance for closing costs may place homeownership out of the reach of those buyers who just squeak by.  You should contact a Lender to see how these FHA initiatives will affect you, especially if you have already been Prequalified and have yet to put in a contract offer.

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Robert Everhart, First Rochester Mortgage Corp.  – August 21, 2010