Mortgage Video & Blogging Community

After the bubble burst on subprime loans in the wake of the mortgage meltdown of late 2007, loans backed by the Federal Housing Administration (FHA) became the de facto “go-to” instrument for anybody seeking to secure a mortgage with a low down payment and/or less than stellar credit.  However, being the “low-down-payment-imperfect-credit-go-to-lender” comes with a price…sometimes a steep one.

Facing rising defaults and a battered balance sheet, FHA has announced sweeping changes and stricter guidelines.  In a nutshell, borrowers will have to bring more money to the table, and have better credit scores in order to qualify.

Overall there are four major changes to keep an eye out for:

UP-FRONT MORTGAGE INSURANCE
The Up Front Mortgage Insurance premium is being increased from 1.75 percent to 2.25 percent.  Up Front MIP is paid on every FHA transaction, and is normally rolled into the overall loan amount – on a $200,000 loan with 3.5% minimum down payment, the increase results in almost $1,000 being added to the loan amount.

FICO/DOWN PAYMENT
Borrowers with FICO scores less than 580 will see their down payment requirement jump from 3.5% to 10%.  However, many banks won’t approve an FHA loan with a FICO less than 620 (some even 640), so in many cases this change won’t apply.

SELLER CONTRIBUTIONS
The maximum allowed seller contribution is being reduced from 6% to 3%.  This drastically changes the amount sellers can contribute for closing costs, pre-paid expenses, etc, and makes it more difficult for first-time homebuyers (pinching dollars as it is to make their down payment) to pick up the tab.

INCREASED ENFORCEMENT
FHA is also increasing it’s enforcement/oversight of FHA-approved lenders.  This in the wake of FHA issuing subpoenas to 15 lenders because of abnormally high FHA default rates.  Expect lenders to begin implementing increased guidelines in addition to FHA guides.

Interestingly, there was no mention of an increase to the minimum down payment of 3.5% (it has been rumored for some time that this figure will increase to 5%), and for now no change to the monthly Mortgage Insurance premium (holding steady at 0.55%).  The above changes, however, go into effect this Spring.

Overall these changes point to one fact: FHA loans are getting tougher.  Tougher to close.  Tougher for borrowers to afford.  Tougher for banks to approve.  For loans that have occupied some 30% of all originations, this prospect can seem bleak.

If you’re in the market for an FHA loan – or are working with clients for whom FHA is their only option – and are looking for advice on how the changes effect you, call or send me an email with your questions.  We are an FHA approved lender, and have a mountain of experience working with these loans.

For additional information about mortgage financing and the Portland, Oregon market, visit www.thelendingjournal.com.