The Federal Housing Administration (FHA) announced several policy changes designed to reduce the risk of FHA home loans to lenders and to strengthen the financial position of the FHA. Borrowers applying for FHA home loans will find themselves paying a little bit more for these loans and needing to meet higher standards for their credit scores.
Among the changes to FHA home loan rules announced today are the following:
1. Mortgage insurance premiums will be increased. The upfront mortgage insurance premium, which most borrowers wrap into their mortgage loan, will be raised to 2.25%, which adds significantly to the cost of these loans.
The FHA is also requesting legislative authority to increase the monthly mortgage insurance premiums charged to all borrowers. If approved, the FHA expects to reduce the upfront premium so that more of the mortgage insurance costs are paid on a monthly basis.
The change to the upfront premium will go into effect this spring, with the official date to be announced tomorrow.
2. New borrowers will need a minimum credit score of 580 to qualify for the 3.5% down payment program. Borrowers with a lower score than 580 will be required to make a down payment of at least 10%. This will take effect in early summer. While the FHA establishes this minimum score in the new FHA home loan rules, many lenders require a higher credit score in order to qualify borrowers for these loans, often at a minimum of 620 or 640 depending on the lender and on other factors such as income, debts and assets.
3. Seller concessions, such as seller-paid closing costs, will be reduced from 6% to 3% of the total home price. Currently buyers can ask the home seller or home builder, in the case of a new home, to pay some of the closing costs. Beginning in early summer, buyers will be forced to pay more of the costs themselves if they choose an FHA home loan. Conventional loans are typically already limiting seller-paid concessions to 3% of the sales price.
In addition to the above changes to FHA home loan rules, the agency has announced increased enforcement of high standards for FHA lenders in order to decrease instances of fraud and of loan defaults.
In 2009 FHA loans represented about 35% of the mortgage market, compared with less than 5% at the height of the housing market in 2005. Rising default rates among FHA borrowers and concern that the combination of low down payments and poor credit among some of these borrowers could lead to even more defaults in future years created the impetus for today's FHA home loan changes.
Written by Michele Lerner
HULIQ.com
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