There seemed to be a lot of attention in the general media to FHA's announcement last week of stricter guidelines. There should be NO cause for concern here.
Yes, any changes to the FHA program are going to generate a lot of attention because the FHA program is now approaching a 40% market share!
However, the changes announced should not affect the majority of transactions in any meaningful way.
Here are the 3 basic changes:
1) Borrowers with less than 580 credit scores will have a minimum down payment requirement of 10% (as opposed to 3.5% for everyone else). The reality is that almost all lenders have their own "overlays" to the FHA guideline (and have for some time) requiring a minimum credit score of 640 to qualify for an FHA loan. Therefore, borrowers with less than a 640 credit score will be hard pressed to find a lender willing to grant them an FHA loan, regardless of down payment.
2) The Up Front Mortgage Insurance Premium is going up from 1.75% to 2.25%. This premium is charged upon origination of the loan and is FINANCED. It is ADDED to the borrowers base loan amount, therefore is amortized over 30 years. To put it in perspective, it would add $5.68 to the monthly payment on a $200,000 base loan at a 5.50% interest rate.
3) Maximum Seller Contributions are being reduced from 6% to 3% of purchase price. The reality is that the seller contribution cannot exceed the amount of closing costs anyway. In most transactions, the closing costs don't get anywhere near 6% of the purchase price. The 3% limit should satisfy the vast majority of transactions.
These are the highlights and should not have any detrimental effect in almost all cases.
Have a great week!
Ruben Concepcion
Here is the full FHA press release:
FHA Announces Policy Changes to Address Risk and Strengthen Finances
New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities
WASHINGTON - Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA's capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation's housing market recovery.
The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.
"Striking the right balance between managing the FHA's risk, continuing to provide access to underserved communities, and supporting the nation's economic recovery is critically important," said Commissioner Stevens. "When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency's history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market's recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities."
Announced FHA Policy Changes:
•1. Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
•· The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
•· If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
•· This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
•· The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
•1. Update the combination of FICO scores and down payments for new borrowers.
•· New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
•· This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
•· This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
•1. Reduce allowable seller concessions from 6% to 3%
•· The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
•· This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
•1. Increase enforcement on FHA lenders
•· Publicly report lender performance rankings to complement currently available Neighborhood Watch data - Will be available on the HUD website on February 1.
•· This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
•· Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
•· Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
•· This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
•· Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
•· Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
•· HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
•· Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
•· Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches
In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.
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