FHA has tightened it's lending requirements in order to maintain their capital reserves and manage risk better. Here is what a recent article in Realtor Magazine had to say. They are raising the upfront mortgage insurance premium (effective April 5th), increasing the minimum down payment for some borrowers, and reducing the seller concessions (both to be posted in the Federal Registry in February with a 60-90 day comment period). The FHA is also seeking legislation to raise the annual mortgage insurance premium above the current level of .55 percent.
What does this mean to the borrower?
With the upfront mortgage insurance premium going to 2.25 percent from 1.75 percent, it won't affect the amount of cash the buyers will need to raise (it can be financed), but it will affect how much house the buyer can afford. It could increase their monthly payments by $50 to $100.
The minimum down payment increasing to 10 percent for anyone with a credit score of 580 or less will impact many first time homebuyers who have yet to establish a credit history. The difference between 3.5 percent and 10 percent on a $150,000 home is an extra $9,750 in down payment the buyer will have to come up with.
The reduction in the seller contribution from 6 percent to 3 percent will hurt the buyers as well, as now they are having to pay much more of their closing costs, like title insurance and the mortgage origination fee. Buyers may have to come up with another 1 percent of the mortgage amount.
There is a fine balance between providing access to underserved communities, supporting the economic recovery, and maintaining a healthy financial balance for the FHA to thrive and survive. Let's hope the FHA tightening their lending requirements will not go too far to disrupt this balance of what is good for the economy.
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