With the recent downturn in housing, and the subsequent disappearing act of sub-prime mortgages, more and more borrowers are relying on FHA financing to purchase homes. A few years ago, only 4% of all mortgages were insured by FHA, but in recent months that number has ballooned to over 30%. This additional, unexpected volume has caused the federal mortgage insurer's reserve fund to dip below its mandated minimum.
In an effort to increase the size of the reserve fund, Federal Housing Administration (FHA) Commissioner David Stevens recently announced a set of policy changes that directly address the problems at hand. "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."
FHA Policy Changes That Will Affect You:
- Mortgage insurance premium (MIP) will be increased from 1.75% to 2.25% to build up capital reserves and bring back private lending.
- The MIP can currently be rolled into your loan, but there is talk of requiring it to be paid up front, as well as eventually raising the fee to 3% of the loan amount. This change would be good for the reserve fund, but a major setback for aspiring home buyers.
- 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, and some say the minimum down payment could possibly be increased to 5%. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
- Reduce allowable seller concessions from 6% to 3%
- Sellers are currently allowed to pay up to 6% of the purchase price towards buyer's closing costs and pre-paid items, however the new changes will reduce the maximum concessions to just 3%.
All of these proposed changes will greatly increase the amount of money that borrowers will have to bring to closing, thus significantly decreasing the amount of borrowers who will be able to utilize FHA financing to purchase a home. While HUD must remain diligent in managing its risk exposure, it must also be careful not to drive buyers out of the marketplace in a time of great volatility in the real estate industry.
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