FHA Mortgage Lending Changing – What Consumers Need to Know?

Interested in capitalizing on low current mortgage rates and obtaining a home mortgage loan backed by the Federal Housing Administration (FHA) in 2010? If so, be prepared to meet stricter lending guidelines and borrowing requirements for FHA loans. At a recent hearing by the House Subcommittee on Housing and Community Opportunity, Federal Housing Administration commissioner David Stevens discussed proposed changes to the current FHA mortgage-lending model that aim to increase the amount of funds in its reserves while “ensuring that mortgage financing remains available” through the program.

The FHA is modifying its guidelines in order to provide a much-needed boost to its reserves

The FHA currently insures about $685 billion in loans and remains a very popular option for first-time home-buyers. As a result of its expanded role within the mortgage-marketplace, however, its reserves have dropped to $3.6 billion, or approximately 0.5 percent of the amount of outstanding loans that it has insured. By law, the FHA is required to maintain in its reserves 2 percent of the total amount of loans that it insures (in this case it would need roughly $14 billion in reserve), and without new lending and borrowing practices for FHA refinance and FHA purchases, American taxpayers may be forced to bear the burden of bailing out the FHA through taxes. Despite the depletion of its reserves, however, Commissioner Stevens remains optimistic that a bailout will not be necessary through modifications to the current system. He reiterated the importance of FHA insured loans and described the FHA’s current expanded role in the mortgage-marketplace as being essential to building a “bridge to economic recovery.”

So, as the curious home-buyer, what are some of the proposed changes to FHA loans and how will they affect you?

Premiums and Fees:
·    Starting April 5, the FHA will be increasing its upfront premium to 225 basis points (i.e. charging 2.25 percent of the total amount borrowed in addition to annual premiums)
·    FHA is seeking Congressional approval for an annual premium increase to 85 basis points for loans up to 95 percent loan-to-value (LTV), and 90 basis points for LTVs above 85 percent. If the FHA gets this Congressional consent, it will lower the upfront premium to 100 basis points.

Credit Score:
·    FHA is proposing a floor on credit scores (FICO score above 580) to qualify for a 3.5 percent down payment.
·    If you have a credit score between 500-579 you are eligible for an FHA loan with 10 percent down
·    Borrowers with a credit score below 500 will not qualify for FHA-backed mortgages.

Despite pressures, the FHA will not raise its minimum down payment requirement to 5%, as Commissioner Stevens articulates “such a policy change would reduce the volume of loans endorsed by the FHA by more than 40 percent…This translates to more than 300,000 fewer first-time home-buyers.”

Total Mortgage Services is a fully approved FHA lender and offers some of the best current FHA mortgage rates available. Call us today with your FHA mortgage questions at 877-868-2503 to speak with one of our mortgage professionals and see if FHA is right for you. Also, be sure to tell us your opinion on the state of FHA below, we would love to hear your thoughts!