This is a post first put here. I thought it so important for you to know that I have reposted it.
Reports that FHA may be the next ’sub-prime’ implosion have been swirling for some time now. The reason is that an FHA loan is simply a mortgage that is insured by HUD against default, to protect the lender, and the reserve insurance funds are dwindling. And if HUD were to run out of money to insure these loans, then FHA lending would die.
That scenario is unlikely to happen, which was attested to by HUD Secretary Shaun Donovan yesterday before the House Committee on Financial Services. However, what it does mean is changes, and possibly BIG changes are in the works for FHA lenders.
Nothing has been decided yet, but HUD has floated out there several changes that are likely to be implemented in the coming few months. An overview of the changes that affect Georgia FHA loans the most are:
- Increased minimum FICO scores for home buyers: Currently, HUD does not mandate a minimum credit score to qualify for FHA financing. However, nearly all lenders have instituted their own minimums, ranging from 620 to 660. HUD has not indicated what the minimum will be; but my guess is to look for it to be in the 620-640 range.
- Seller concessions will be lowered: Currently the sellers can contribute up to 6% of the sales price to pay closing costs, pre-paids and any points to buy down the interest rate. That will likely be lowered to 3% maximum. Now, 3% covers the closing costs and pre-paids in the vast majority of circumstances – but this will stop sellers from ’sweetening’ the deal by offering to pay for a permanently lowered interest rate by offering to pay points to buy the rate down – a practice that has been catching on somewhat, and is very attractive to a potential buyer.
- Cash required from the buyer will increase: This one is unclear at present what form it will take. Currently an FHA buyer needs to bring a down payment of at least 3.5% of the purchase price. There has been talk of raising the minimum required down payment to 5%. However, it is not clear if this will be the outcome or not. What is clear, is HUD wants its FHA buyers to have more “skin in the game”.
- MIP Premiums to increase: Conventional loans with lower down payments are insured by private companies with the PMI payment. Similarly, FHA loans have an Up Front Mortgage Insurance Premium, which is what replenishes HUD’s insurance pool so that they can insure against default, and of course the monthly MIP payment. Currently on an FHA purchase HUD collects 1.75% of the loan amount as the Up Front MIP, and .55% of the loan amount annually, as part of the monthly mortgage payment. Not sure how much, but it looks likely that the Up Front MIP amount will increase. And from my reading of the Secretary’s comments, the monthly premium amount may remain the same.
Changes are coming fast and furious. So, on top of all the other reasons you have to buy a home financed with an FHA mortgage now, i.e. historically low mortgage rates, a tax credit for most buyers and historically low housing prices, now you have yet another reason to act now and buy. FHA financing will become more costly and more difficult to qualify for in the near future.
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