What You Need to Know About FHA Loan Reform

What You Need to Know About FHA Loan Reform

So you've finally made the decision to purchase a home and you're ready to look at financing options?  Chances are, you may want to look at an FHA Loan and if you are looking into this option some recent changes and legislation may affect how you secure that loan and what you will paying to get it.

What is an FHA Loan?

FHA stands for Federal Housing Administration and it was created as part of the National Housing Act of 1934.  This government entity has been providing mortgage financing to people for more than 70 years.  Typically, FHA loans are an insured mortgage option for people with modest  incomes who can afford to only put a small amount of money down for the purchase of a home.  Buyers have been able to become home owners for as little as 3.5%.   Applicants can sometimes obtain lower interest rates.  When purchasing an FHA loan, home buyers must also purchase mortgage default insurance if they put less than 20% down.

FHA Reform  

With the recent housing debacle many changes to the mortgage lending process have come about.  The FHA has also had to adapt and recent legislation is in the works to reform the FHA loan process.   First, it will increase its up front mortgage insurance premium from 1.75% to 2.25%. It is also hoping to pass legislation that will increase its current monthly premiums by as much as 0.55%.  The increase could hurt buyers, but it is supposed to help balance the FHA budget and guarantee more loans.

According to the FHA website, one of the biggest changes and most significant for most borrowers is the changes in required credit score.  To qualify for the 3.5% down payment option, home buyers must now have a minimum credit score of 580.  Having a lower credit score does not exclude applicants from receiving a loan, but they will now be required to put at least 10% down.

Another change is seller concessions which have been lowered from 6% to 3%.  FHA say this change has been instituted to "eliminate the temptation to inflate the appraised value of a home for sale."

Also under the new legislation, the FHA plans to impose stricter guidelines on current lenders offering FHA loans and may deny access to mortgage originators who issue too many bad loans.  They will also hold lending firms liable for poorly underwritten loans, and make lender performance information available to the public.

Some of the changes, like the credit score requirements, have already been set in place.  Other changes will be coming soon.  Regardless, FHA may still be the right choice for you, but you should definitely go into it with your eyes open and be aware of all of the changes that could directly affect your home purchase.