Most people don’t spend their time tracking FHA policy changes, unless of course you’re in the real estate industry like me. I received this information regarding some changes in the Federal Housing Administration (FHA) this week, and wanted to share it for the benefit of those in the Chapel Hill and Durham area.
The bottom line is this: FHA is tightening up its policies and instituting stricter requirements for providing mortgages. Their rationale is simple. FHA is no longer a cash-flushed organization, quickly handing out loans to all who ask. After the mortgage crisis, it seemed like nearly everyone wanted an FHA loan. Understandable. But, like any financial institution, the Federal Housing Administration needs to find out how it can serve the underserved while at the same time managing risk, all the while trying to assist the nation’s economic recovery.
Here is a quick snapshot of some of the major changes.
- Up-front mortgage insurance premiums will increase to 2.25% (formerly it was 1.75%). This will help increase the agency’s reserve fund, which is in dire need of replenishing.
- Successful loan applicants will have a minimum credit score of 580 to be eligible for the 3.5% down payment. Borrowers who have lower credit scores will need to find a way to provide a heftier down payment (10%).
- In addition, sellers get a shorter leash, too. Now, sellers are required to cap at 3% the amount they offer for closing costs. They used to be able to pay closing costs up to 6% of the home’s price. This requirement brings FHA loans in line with typical industry standards, while preventing the practice of inflating appraisals.
- Any lenders offering FHA mortgages much assume liability for the loans. FHA is serious about this new requirement, and will occasionally publish lender performance reports for the general public.
Why all the changes? As I mentioned above, FHA needs to protect its assets (and thus its mortgages) as best it can. Everyone is adapting to the new economic climate—individuals, big business, and government alike. As an indicator of their tenuous status, nearly 15% of all FHA loans were delinquent at the time of last year’s third quarter reports. Don’t worry, FHA will probably not lose its stature as the biggest lending agency. Almost half of all first time homebuyers use FHA loans, and last year, 30% of all loans came through the FHA.