The Federal Housing Administration more commonly known as FHA has recently announced major changes to their program to ensure long-term financial soundness. If you are involved in the retail side of real estate you need to listen up. If not, then listen anyways. You might learn something.
The FHA’s main objective is to help serve the people that are not serviced by conventional lending programs. In other words, people that cannot qualify in the private sector turn to FHA to get help them obtain a home loan. FHA insures the home loan so that Bank of America or Wells Fargo feel comfortable lending you the money, because if you don’t pay they are covered.
Remember FHA is not the lender they only insure loans and they don’t insure you they insure the bank from loss.
In a nutshell, currently a typical FHA loan consists of the following:
- at least a 500 fico credit score
- 3.5% down payment
- Pay a (one time only) upfront mortgage insurance premium of 1.75% of the loan amount or finance it into your loan amount.
- Pay an annual insurance premium of .55 of the loan amount (This amount is broken down to 12 monthly payments)
- A seller of a property could pay up to 6% of your closing costs and fees
Due to these current guidelines the FHA has recently been hit by an upswing of defaults rocking it to its core (see my article on HUD homes). Their insurance reserves are at all time lows and they have to do something in order to survive. So because of these circumstances the FHA as scheduled the following changes to their guidelines:
- Min Fico credit score to be 580
- Down payment to remain 3.5% for those with a score of 580 or more. 10% down payment required for those with less than a 580 Fico credit score.
- Upfront Mortgage Insurance Premium to be 2.25% of the loan amount. The option of financing this amount into your loan will still be available.
- Sellers will be limited to a maximum of 3% of the sales price when helping you out with closing costs and fees.
- Currently the FHA is asking congress to allow them to raise the annual insurance premium up from the current .55% of the loan amount. The FHA believes that by doing this it will allow them to lower the Upfront Mortgage Insurance Premium in the future.
Look for the Upfront Mortgage Insurance Premium to change Spring 2010 and the Fico minimum/down payment & seller concessions to change Summer 2010.
For more details you can read the announcement from the FHA in it’s entirety here.
Any changes that hinder the availability of money to purchase homes is always an unwelcome sight. On one hand you want money to be easily obtainable and on the other you want banks to have sound financial judgement. It’s a catch 22. The FHA is doing the right thing to reduce its risk of insolvency during our volatile economic period. The last thing we want to see is another wave of unsound loans crashing into foreclosures.
Good luck in all you do America.
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