FHA Loans to Cost More

Just a few days ago, the Federal Housing Administration (FHA) changed their rules for borrowers applying for their mortgage backed loans. These rules are in part in response to the growing number of FHA mortgages that are facing foreclosure and in part to crack down on unscrupulous lenders who, as Commissioner David Stevens implies are responsible for the FHA’s increasing defaults and diminishing financial reserves.

In the past few years more and more consumers have turned to the FHA for home financing and the agency has approved too many risky loans so they are now repositioning. Commissioner Stevens told a group of reporters, “Not everybody should own a home.”

A quick insight regarding the FHA. This agency is a government insurance company that backs mortgages and refinance loans for lenders who follow their established guidelines. In 2009 the agency insured about 1.9 million loans which amounts to about 30% market share of the mortgage business. In comparison FHA backed only 1.1 million home loans in 2008.

Recent reports from December 2009 report that the agency is insuring a total of 5.8 million single-family homes. This amounts to over $750 billion in loans. That same report revealed that over 500,000 of these government insured loans were either seriously delinquent or headed for foreclosure.

Okay, here’s the biggest change. Although no specific date has been given, starting sometime this spring borrowers will have to pay more upfront for the Up Front Mortgage Insurance Premium (UFMIP). This change may not become permanent, but at least for a while this premium will increase from the current 1.75% of the loan amount to 2.25%.

FHA charges homeowners this mortgage insurance as an up front fee and as an additional monthly insurance premium added to their payment. As an example on a $250,000 loan, the borrower would pay $4,375, or 1.75% at closing. This amount can be paid by the borrower, or added to the base loan amount effectively increasing the amount the borrower is obligated to repay. With the increase in UFMIP, the same loan would cost the borrower $5,625, and increase of $1,250.

Additionally the FHA has stated that it will ask Congress to raise the ceiling on the amount it can charge borrowers for the annual mortgage insurance premiums that are paid every month. Currently these premiums cannot exceed 0.55% of the loan amount. On that same $250,000 loan, that’s $1,375 a year broken down into monthly payments of $114.58. No estimates of just how high this increase may go have yet been released.

Two other significant changes are also coming. Borrowers with credit scores below 580 will be required to put down a minimum of 10% of the home’s purchase price. While FHA still insures loans with these low credit scores, good luck finding any lender who is willing to touch these loans. There area a few still out there, but most lenders have taken the opposite approach with some requiring borrowers to have credit scores of 640 and higher. Statistics show that most home mortgage defaults are by borrowers with credit scores below 580.

The other significant change is to seller concessions. Currently sellers who really want/need to sell their home are allowed to “help buyers” by conceding up to 6% of the purchase price toward the buyer’s closing costs. They are not allowed to apply any of these concessions toward the borrower’s down payment, but they can, in effect, reduce the home’s price by covering some or all of the buyer’s closing costs. FHA will reduce these “seller concessions” from 6% to 3%.

There are no announced plans to change the current guidelines allowing for family members to “gift” the down payment and closing costs which will most likely make this option more popular with some home buyers. However, before going down this path, check with your lender for the specific requirements and paperwork.