Link to this page Print RSS  

FHA's Revised Mortgage Lending Model May Affect Your Home Purchase in 2010

04/14/2010

Ready to take advantage of historically low mortgage interest rates? If you're thinking about pursuing a federally-backed FHA home mortgage loan, here's something you should know. FHA loan borrowing requirements and lending criteria aren't what they used to be.
In an effort to build up reserves and ensure ample funds for all borrowers, significant changes have been made to the FHA's mortgage lending model.

A favorite option among first time homebuyers

FHA loans are the loan of choice for many first time homebuyers because they're backed by the federal government and easier to qualify for than conventional loans. These loans are so popular that right now, nearly $700 billion worth of mortgage loans are insured by the FHA.
But even the FHA has requirements that need to meet. Among them is a requirement to maintain reserve funds equal to two percent of the total amount of insured mortgage loans, which is equal to about $14 billion.

Problem is, the FHA's reserve fund balance has dropped to $3.6 billion, or about 0.5 percent of the amount of loans currently insured causing the FHA to push for revised FHA loan guidelines. This shortfall presents a potential burden to taxpayers who would have to make up the difference if alternative revenue generating measures weren't put into place.
To protect weary taxpayers against the prospect of another bailout, the FHA has made changes to its borrowing requirements and lending criteria, including:

1. Increasing up-front mortgage insurance premiums

Presently the up-front mortgage insurance premium rate is 1.75 percent of the total loan amount. That's been raised to 2.25 percent effective April 5, 2010.

The FHA is also seeking approval from congress to increase annual mortgage insurance premiums as follows: Up to 85 basis points for loans with a LTV ratio up to and including 95 percent; and up to 90 basis points when the LTV ratio exceeds 95 percent.

2. Increasing low down payment qualifying credit scores

The minimum credit score required to qualify for the FHA's 3.5 percent down payment option has increased to 580. Borrowers with credit scores between 500 and 579 will now be required to make a 10 percent down payment. Those with credit scores below 500 will no longer be eligible for FHA-insured home mortgages.

Although pressure to increase the FHA's minimum down payment to 5 percent was strong, this didn't happen. FHA Commissioner Stevens successfully argued against the increase by stating that it would result in a 40 percent decrease in FHA-endorsed loan volume; a figure he says translates into several hundred thousand fewer homebuyers entering the housing market for the first time.

Link to this page Print RSS