With the focus on Fannie Mae and Freddie Mac, many have forgotten that big changes are in store for FHA loans as well.  With the passing of HR 3221, the "Housing and Economic Recovery Act" this summer several significant changes were made to the FHA program. 

The easiest one to understand (and possibly have the widest effect) is that the buyer contribution requirement was raised from 3% to 3.5%.  On a $200,000 home, this means that a buyer will need to come up with an extra $1000 for a total contribution of $7000.  This is expected to decrease the risk to FHA and help it weather the current market challenges.

Another important change is that there will be a 1 year moratorium on the new "risk-based pricing" for the FHA's mortgage insurance premium.  Just recently on July 14^th FHA had switched from a flat 1.5% percent of the loan amount upfront fee and .5% annual fee to a system of tiers.  Those with higher credit and down payments would have a lower fee, while those at higher risk would have higher fees.  Because of HR 3221, this is put on hold until October 1^st 2009 and we will revert back to the "one size fits all" model.  This was implemented to increase affordability for homeowners and home buyers with lower credit, income and assets.

The most controversial (and possibly the most discussed) change will be the elimination of seller-financed down payment assistance programs (DPA).  It is important to point out that DPA from family members, employers, charities, local, state or federal governments will still be accepted.  This change only applies to programs in which the owner or builder as the seller was providing the DPA.

The reasons why this DPA program was cancelled is complicated and it is still a highly debated issue.  Many studies were performed by HUD and other parties and evidence was shown that it was correlated with an increased risk of fraud and foreclosure (we will review this in another post).  HUD had actually attempted to prohibit this program last year, but a court order allowed the program to continue.

What this means is that an ever increasingly popular method to obtain 100% financing will no longer be available.  In fact, most lenders stopped accepting applications for loans with this program on September 1^st to allow time for them to be processed.  However, this may not be the final word on seller-funded DPA as a new bill, HR 6994 the "FHA Seller-Financed Downpayment Reform and Risk-Based Pricing Authorization Act of 2008" has been introduced to bring it back.

Chairman of the House Financial Services Committee, Barney Frank, reported at that the bill is certain to pass in the House of Representatives and has the approval of the Secretary of HUD.  Although the program has its flaws and can be used improperly, the National Association of Mortgage Brokers supports the effort to preserve this program as it helps many low- to moderate-income families obtain homeownership.  The program should be regulated and reformed, but during this turbulent time the FHA should be continuing its mission to help provide affordable and secure financing.

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Roland Carrillo, PhD
Branch Manager
VanDyk Mortgage in Cary, NC
Email: rjcarrillo@gmail.com
Website: http://www.mymortgageanalysis.com/ 

Our branch specializes in affordable lending options including FHA / VA and the Community Heros program.  As both a banker and a broker, you have access to a full menu of products including all Fannie Mae and Freddie Mac Conforming loans, Reverse, Jumbo and Commercial financing on a variety of property types.  We are located in Cary, North Carolina and are within easy reach of the entire RTP Area including Wake, Durham and Orange Counties.