January 26th, 2010

On January 21, 2010 FHA announced one of the many policy changes that will affect home buyers. How will these changes affect you? Let’s take a moment to review.

In the mortgagee letter released on January 21, the first change to be implemented will be the increase of the Upfront Mortgage Insurance premium from 1.75% to 2.25%. This will affect any loan application with an FHA Case Number issued on April 5, 2010 or after. This increase in mortgage insurance premiums has been set in place to cushion against rising defaults on FHA insured loans. This money will enable the department to increase their reserves while protecting taxpayers from another bailout of a failing agency.

The amount of the Upfront Mortgage Insurance Premium will still be financed into the loan amount, however, it will increase the monthly payments as the amount borrowed will increase. This will have a small affect on qualifying. For example, on a $250,000 loan, currently the Upfront Mortgage Insurance Premium would be $4375 and after April 5 would increase to $5625.

Additionally, FHA has announced there will be changes which will be implemented by summer on the following items. The mortgagee letter clarifying the changes has not yet been released, but is expected in February.

• Seller concessions will decrease to 3% from the current 6% (this will affect the ability to credit higher amounts for closing costs)
• Credit score requirements for borrowers with scores lower than 580 or no score will be required to put down a minimum of 10%. However, most lenders currently require a credit score of 620
• Increase of the Monthly Mortgage Insurance (MMI) premium. Currently the MMI is .5% of the loan amount and discussions within FHA are to increase these premiums. For further questions on Mortgage Insurance, see my post on What is PMI?

In addition to these changes, FHA has placed stricter requirements on Lenders making FHA loans to ensure that Lenders are making good credit decisions. FHA will monitor the default rates of loans originated by approved lenders and if the lender is exceeding default limits, their FHA approval will be revoked.

All in all, how will these changes affect you? The increase in Mortgage Insurance and proposed change in MMI will have a small impact on qualifying due to a minimal increase in payment. The seller concessions decreasing will affect the ability to negotiate the payment of closing costs by the seller, but in the big picture, it will also protect the consumer from inflated home values, as usually the concessions were worked into the purchase price of the home.

The good news is most of these changes are a bit in the future! In order to take advantage of the tax credit, you must be in contract before April 30th and close no later than June 30th 2010. So avoid all of the changes, take advantage of the tax credit and find your dream home today!