I’m happy to welcome guest blogger, Patrick Maddigan, Esq.,the Director of Operations and Business Development at our new entity, TitleHub Closing Services. Pat is writing today on the new FHA lending changes.
On January 20th, the Federal Housing Administration (FHA) announced it would tighten certain lending requirements and guidelines with the purpose of reducing risk and improving its weakening financial health. The changes include:
- Borrowers must pay an increased upfront mortgage insurance premium (MIP) of 2.25% of the loan amount (increased by 50 basis points from 1.75%). FHA has also requested legislative authority to increase the maximum annual MIP so it can reduce upfront costs for prospective home buyers.
- For borrowers with poor credit (credit score of below 580), they must make a minimum down payment of 10% (up from 3.5%).
- Seller credits for closing costs are cut by 50% and cannot exceed 3% of the purchase price.
- FHA will continue to increase enforcement on FHA-approved lenders, and will publicly report lender performance rankings to improve transparency and accountability.
The formal Mortgagee Letter released by FHA can be found here. FHA has not announced a firm date on which the proposed changes will be effective, though they are expected to go into effect in either spring or summer.
The Rising Tide Of FHA Loans
With the current recessionary economic state, constricting mortgage availability, and general credit crunch, FHA loans have become extremely popular. FHA loans, which feature low down payments, competitive interest rates, and more forgiving credit requirements, have proven the loan of choice for many first time home buyers and those with marginal credit scores. In 2009, approximately $290 billion in FHA loans were issued, up nearly 500% from 2007. Despite the housing downturn and credit crunch, FHA mortgages have continued to grow, thanks in part to incentives like the First Time Home-Buyers Credit. In anticipation of the continued increase in interest and demand for FHA mortgages, HUD is requesting $400 Billion for the expected flood of FHA loan applications in 2010. The dramatic rise in FHA backed loans, however, has caused the steady depletion of FHA reserves, putting the agency at greater risk of financial distress and even collapse. Regulators proposed the changes outlined here as to ensure its long-term financial integrity while positively impacting the ailing housing market.
Two of the recently announced changes in FHA loans will have a clear effect upon buyers in the more immediate future- the rise in upfront mortgage insurance premiums (UFMIPs) and the FICO/minimum down payment adjustments.
Up-Front Mortgage Insurance Premiums Increased To 2.25%
The first change that will immediately impact borrowers is the FHA’s increase of the required up-front mortgage insurance premium by 50 basis points to 2.25% of the base loan amount. This change is effective beginning April 5, 2010.
FHA requires two types of mortgage insurance premiums (known in the industry as a MIP): an up-front and an annual. The MIP is similar to private mortgage insurance, or PMI, for borrowers investing less than a 20% down payment. The MIP amount is based on a percentage of the remaining debt on the FHA loan, so as the mortgage is paid down, the MIP will decrease. Unlike private mortgage insurance, FHA borrowers are able to finance the MIP into the loan, thereby spreading the cost over many years. The “annual” MIP is termed annual but paid monthly as part of the loan payment.
For a $300,000 loan, the increase in the MIP fee would add approximately $1,447 to the loan amount, not a huge amount, but nothing to sneeze about when financed over a 30 year loan term.
Minimum FICO Credit Score/10% Down Payment for New Borrowers
New borrowers will now be required to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5% down payment program. Borrowers with a credit score below 580, while still able to qualify for a FHA loan, must now put down at least 10% of the purchase price–an amount that may be prohibitive for many borrowers with poor credit.
Until now, there has been no minimum FICO score requirement imposed by FHA, however some lenders who fund FHA loans have previously imposed their own requirements (often lenders would not work with credit scores under a 620), so the net effect of this change may not be that significant. While this will preclude some of the underserved community the FHA is seeking to help, it will better balance the FHA’s risk levels and still continue to allow borrowers who have historically performed well to access the benefits of an FHA loan.
Impact Of The Changes
The FHA is making an effort to lower its overall risk and improve the financial soundness of its insured loans, which in turn allows for the continued support of home buying in the United States. In doing so the FHA must find a way to keep their insurance fund’s capital ratio returns above the Congressionally mandated 2%, while continuing on their overall mission of aiding borrowers in underserved communities and facilitating the recovery of the housing market
These changes, along with the other FHA reforms (including a reduction in allowable seller concessions and significant changes and oversight for lenders) will have varying effects on borrowers interested in a FHA loan. For borrowers with low credit scores, some of these changes, such as the higher down payment percentage, will significantly affect their ability to buy a home. In the short term, the changes may motivate borrowers to lock into the old FHA guidelines before the new changes become effective.
Thanks for the great information Pat! We’ll be seeing more of you around here hopefully.
If you wish to speak with a very knowledgeable mortgage lender about an FHA loan, we recommend that you contact David Gaffin at Greenpark Mortgage.