Thursday, March 4, 2010

Recently Federal Housing Administration (FHA) Commissioner David Stevens announced a set of guideline changes to the FHA loan program for the purpose of strengthening loan quality and shoring up FHA’s capital reserves. These are significant changes that will impact both the cost of getting an FHA loan and the down payment requirements as well as providing more strict oversight of FHA lenders. There are four primary changes that we are concerned with here:

1) Mortgage Insurance Premiums will be increased – FHA charges what’s known as an Upfront Mortgage Insurance Premium (UFMIP) on all FHA loans. The UFMIP is paid by the borrower and the cost is allowed to be rolled into the loan amount so borrowers don’t have to pay for it out of pocket. UFMIP premiums are pooled and this pool of funds is FHA’s Capital Reserve which is used to pay for losses on loans that go into foreclosure. Currently, UFMIP is 1.75% of the loan amount, so, for a $100,000 loan the cost of UFMIP is $1,750. Beginning April 5, 2010, UFMIP is going to increase to 2.25%, so for that same $100,000 loan the cost is going up to $2,250. The purpose of this increase is to strengthen the capital reserve fund to cover current losses on bad loans.

2) Increase the Minimum Down Payment Requirement – Currently FHA requires a minimum down payment of 3.5% of the purchase price of a home. The proposed change would require borrowers with credit scores of 580 to put a minimum 10% down. This change is really inconsequential as 95% of lenders today will not make an FHA loan to a borrower with a credit score under 620 anyway. The reason for this is that borrowers with credit scores under 620 have historically not performed well and FHA can hold the lender who made the loan responsible in the event the home goes into foreclosure and FHA is more likely to find fault in the underwriting process of the lender when the borrower clearly has a weak credit history. This change is scheduled to take place in early summer of 2010. There are also rumors going around that FHA may increase the minimum down payment requirement for all borrowers to 5%, but, we’ll just have to wait and see.

3) Reduce Allowable Sellers Concession from 6% to 3% - The Sellers Concession, otherwise known as Seller Paid Closing Costs, is a very important component of the FHA loan. Most FHA borrowers have only a limited amount of funds available to buy a home and the closing costs and prepaid items (property taxes and insurance) can really add up. Here in Oakland County, Michigan, a buyer purchasing a $150,000 home can expect typical prepaid items plus closing costs to add up to approximately $6,500 which is about 4.5% of the purchase price of the home. IF FHA will only allow the seller to pay 3%, or $4,500, then the buyer will have to spend an additional $2,000 out of pocket to purchase the same home! This change has not yet been approved but if it is it will go into effect this summer as well.

4) Increased Enforcement of FHA Lenders – The idea here is to push out lenders who are creating an excessive number of non-performing loans. FHA plans to publicly report lender performance rankings and to make lenders more responsible for loans they approve that go bad. This is a good idea because in order for the FHA program to work, loans that are approved need to perform – meaning the borrower makes their payments on time. This will have some negative impact though in that this type of stricter oversight by FHA will also cause FHA loan underwriters to become stricter making it difficult for more marginal borrowers to be approved. This change has actually already been implemented and FHA has shutdown 2 of the nation’s largest FHA loan underwriters in the past 6 months!

So, it looks like it’s going to become more costly to obtain an FHA loan, buyers may have to make larger down payments, sellers can’t pay as much of the buyers closing costs and lenders making FHA loans will be more careful about approving only those loans that have a strong likelihood of performing.


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