Welcome to the New World of Federal Housing Authority (FHA) Mortgage Financing!
Bad news for FHA borrowers looking to apply in 2010. Qualifying guidelines have tightened up significantly, and borrowers face higher costs in the form of fees associated with the application process.
There is some good news. A rumored increase in the minimum down payment, from 3.5% to 5% of the purchase price, did not come to pass.
Here are the changes the FHA did roll out:
- Maximum seller contributions were reduced from 6 percent to 3 percent. Sellers can now credit a maximum of 3% to buyers for Closing Costs, Prepaids (City/Town taxes and Insurance) instead of the previous 6%. This means borrowers will have to show up at the closing or signing of the Sales Contract with more cash.
- The “upfront” MIP (Mortgage Insurance Premium) charged on all FHA loans is increasing from 1.75% to 2.25%
- Applicants hoping to borrow with a 3.5% down payment will need a minimum FICO score of 580.
What do I think of all of this?
You should have seen this coming…I’ve been telling you for a few months now! When the subprime mortgage market collapsed, FHA loan programs picked up some of the slack. The government actually encouraged the trend by changing some of the program guidelines and working to speed up the notoriously slow approval process.
The huge increase in the number of FHA loans, however, also increased the risk profile of the average borrower. Meaning more defaults and higher costs to Uncle Sam. The highest percentage of foreclosures right now are clients with FHA mortgages. The increased insurance premium is designed to increase the funds available to pay off defaults, while tightening guidelines aim to reduce that average risk profile.
If I was a potential Borrower I would get my ducks in a row… Make sure I have as good as possible FICO scores and a down payment.
I predict that we will see that 3.5% to 5% hike the minimum down payment soon, along with higher minimum thresholds for FICO scores.
But wait – it’s even worse than that!
Banks, Brokers, Direct Lenders, etc. have their own set of “FHA guidelines.” In most cases, these are even stricter than FHA guidelines. I know of one Bank that will be going to a 700 minimal FICO score requirement for FHA financing in the near future!
The answer is to start to lay the foundation immediately, even if you don’t expect to borrow the money for some time. Establish a relationship with a bank. Do some research (or have a qualified loan officer do it for you) on which lenders have the best guidelines for your situation. It may mean switching your accounts to a new bank to start building a solid borrower profile. Make sure you have yourself aligned with a lender that will approve your FHA financing based on their FHA guidelines.
FHA – Federal Housing Authority Website http://www.hud.gov/offices/hsg/fhahistory.cfm
bc@smarterborrowing.com
617.771.5021
