FHA To Raise Upfront Mortgage Insurance Premium

FHA Commissioner David H. Stevens officially announced effective dates to  raise the amount  required for upfront mortgage insurance premiums (UFMIP) for FHA loans, along with other changes.

Commissioner Stevens states, “Striking the right balance between managing risk, continuing to provide access to under-served communities, and supporting the nation’s economic recovery is critically important to the FHA. 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.

By continuing to provide affordable, sustainable mortgage products, FHA will continue to support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.  “

The following are the some of the changes which will be forthcoming soon:

• Increasing the upfront mortgage insurance required for all FHA loans from the current 1.75 percent of the loan amount, to the increased amount of 2.25.  This the commissioner reiterates is needed to strengthen FHA’s capital reserves and to bring back private lending.  The will become effective for all FHA loans with case numbers assigned after April 5, 2010. Eventually, this .50 percent increase to FHA’s UFMIP will hopefully be shifted from the upfront MIP to the monthly MIP after legislative approval in the near future. The commissioner believes the shift to the monthly MIP will have less of an  impact to the borrower due to the fact it is collected monthly for a minimum of five years, rather than all at once at the time of the loan closing, while still accomplishing their objextive of increasing FHA’s capital reserves.
• Increasing the minimum allowed credit score to 580 for borrowers who will be eligible for maximum financing of 96.50 percent Loan to Value (LTV) for purchase transactions and 97.75 percent LTV for refinance transactions.
• If the borrower has less than a 580 mid credit score, then FHA will only allow maximum financing for Purchases and Rate and Term refi’s  allowed in  FHA’s  loan programs to 90 percent. This change will become effective sometime in the summer. It is very difficult to find lenders who will allow a borrower with a mid credit score less than 620 to qualify, so the effect of this new FHA guidance on originations, in my opinion, will not have a huge impact.
• FHA will lower the amount of seller concessions allowed for FHA borrowers from the current 6 percent acceptable level, to the new maximum allowed seller concessions for FHA purchase transactions of 3 percent. FHA commissioner Stevens is of the belief current higher FHA-allowed seller concessions of 6% increases FHA’s exposure to risk, by creating incentives to inflate appraised values. This will also become effective sometime in the summer.
• FHA is going to enhance monitoring of lender performance and compliance with FHA guidelines in an effort to strengthen its portfolio.  FHA will also implement enforcement of lenders to abide by FHA’s guidelines. This will of course make most lenders extra cautious, and enforcement and/or interpretation of FHA guidelines a lot more restrictive,  which may eventually lead to less qualified borrowers qualifying for FHA loans.  It should result in strengthening FHA’s capital reserves by cutting down on borrower default, although may become almost paranoid discrimination of borrwers who should qualify for an FHA to be denied.

Read the complete review of FHA Commissioner David Stevens letter to the public in its entirety.