Austin, TX – U.S. Housing News — If you’re having trouble keeping up with all of the changes to the FHA loan program, you’re not alone. We receive at least one email per week from confused home buyers, regarding the FHA changes they’ve heard about. So we decided it was time to compile all of the recent FHA program changes into one place. We have also created a fact sheet about these loans, and you can download it here.
FHA Home Loans, Defined
The Federal Housing Administration (FHA) is an agency of the federal government. It falls under the Department of Housing and Urban Development. The FHA’s primary mission is to insure mortgage loans made by approved lenders within the United States and its territories. The FHA does not lend money directly to home buyers. Rather, it insures loans by lenders in the private sector. This kind of government backing encourages lending to a wider segment of the populace (including people who wouldn’t otherwise qualify for a home loan).
Changes to the FHA Program
So why have there been so many FHA changes in recent months? These changes are primarily designed to strengthen the FHA’s capital / cash reserves. These reserves dipped to an all-time low recently, following the housing and mortgage crisis of 2008 – 2010. This severe loss in capital was the result of high numbers of mortgage defaults and foreclosures (i.e., bad loans). The FHA insures many of the mortgage loans made by lenders within the private sector. When those loans started defaulting in record numbers over the last couple of years, the FHA’s capital reserves became severely depleted.
Toward the end of 2009, FHA commissioner David Stevens said: “I don’t want to leave the impression that the reserves are adequate … There are real risks to the FHA and we are aggressively addressing those real risks with real reforms.” He explained that the FHA is going to change the way it does business, mainly by reducing the risks it has endured in the past.
So how does all of this translate into action? Here are some changes to the FHA loan program that have already been implemented:
- Borrowers who use FHA home loans are required to pay an upfront mortgage insurance premium. In 2010, this premium was raised from 1.75% of the purchase price to 2.25%, an increase of 50 basis points. This increases the amount due at closing.
- The FHA has also requested permission from Congress to raise the annual mortgage insurance premium. This would offset some of the upfront insurance costs, described above. Overall, it would increase the cost of the loan.
- In the past, the FHA has not had any hard and fast rules about credit scores. It was mostly left up to the lenders. But this will change in 2010. Going forward, borrowers must have a FICO credit score of at least 580 to qualify for the 3.5% down payment. Borrowers with scores below 580 will have to make a down payment of at least 10%, which is a significant difference in upfront costs.
- Another big change to the FHA loan program has to do with seller concessions. HUD has reduced the amount of seller concessions from 6% to 3%. This means sellers will not be allowed to contribute as much money toward the buyer’s closing costs (when an FHA mortgage is being used).
Possible Changes in the Future
The down payment situation may change again in the near future. There is currently a proposal in Congress to raise the down-payment requirement to 5% across the board. As of May 2010, this bill (H.R. 3706, the FHA Taxpayer Protection Act) was still in a committee status. No voting has taken place yet. We are watching this closely, and we will report back if and when the proposal becomes law.
Download Our FHA Reference Sheet
We recently published a reference sheet on the FHA home loan program. It includes some of the changes mentioned above, as well as other helpful information for home buyers. If you are thinking about buying a home with one of these loans, you will find our fact sheet helpful. Learn more here
Disclaimer: This news story contains time-sensitive information about changes to the FHA home loan program. Future changes and modifications could make portions of this article obsolete. Please make note of the publication date for this story. If you want the most current information available, you can visit the news release section of the HUD website.