FHA Loans May Cost More

The Federal Housing Administration (FHA), which insures over 30% of home purchases and 20% of home refinancings in the current real estate market, may be announcing a set of changes that will make it more difficult and more expensive for consumers to obtains loans from that agency.

Way back in 2006, the FHA was responsible for only 3% of all the home loans that were issued. However, because of the collapse of the mortgage market, the FHA, which remained solvent, has become the first resort of home buyers who cannot afford to put down more than 3.5% for the purchase of a new home.

That minimum may soon be subject to change. According to US News, legislation has been introduced that would push the down payment minimum up to 5%. While that increase appears insignificant, a spokesperson from the National Association of Realtors (NAR) suggests that this increase may limit the next group of potential home buyers.

Insurance premiums may also increase. Currently, homeowners pay 1.75% up front for loans, but that figure may go as high as 3%. Because the FHA already has the authority to raise that premium, no legislation will be required. However, the FHA will ask Congress to allow the annual insurance fee that home buyers pay to be raised above the current .50 - .55%.

In addition, the FHA may cut the concession a home seller may make to a buyer at closing from 6% down to 3%.

The reasoning behind the requirement for more money down is that the default rate for FHA loans grew from 13% a year ago to 14.4% during the last quarter of 2009. At the same time, the capital reserves of the FHA have dropped to about 0.54%, which is below the 2% level that the law requires.

While this figure sounds dangerously low, Vicki Cox Colder, president of the NAR, pointed out that the FHA maintains a separate financing account, which gives it a total reserve of more than $30 billion.

The Secretary of Housing and Urban Development, Shaun Donovan, suggested that the increases in down payments and premiums will insure that the FHA can provide short term support for the housing market, and long term access to homeownership. At the same time, Donovan suggested that the increases are designed to lower taxpayer risk.

What is also likely to increase is the minimum allowable credit score that borrowers will have to have. Right now, the minimum FICO score is 550, but most lenders will not consider a loan unless a borrower shows a score of at least 620. Some lenders have moved their requirements as high as 660 in recent weeks.

Critics contend that these proposed changes, especially the additional money needed at closing, will eliminate many marginal buyers. They maintain that an FHA mortgage is the only option for low income families, and that the increases will unfairly impact minority borrowers.

Those who support the increases in cost and credit scores, along with decreases in seller concessions, point to the default rate of 14.4% of homeowners, a group primarily comprised of buyers who came in with negative equity based on the 6% giveback.

They suggest that while home sales may decrease temporarily because of these proposed changes, defaults and foreclosures may also decrease. Fewer foreclosures will lighten the pressure on the financial state of the FHA.

Written by Marc Jablon, Realty Associates
marcjablon@yahoo.com / 561 / 213 – 6139

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