A new program launched by the Department of Housing and Urban Development (HUD) is designed to increase access to FHA mortgage financing. The new FHA program was announced this week and will be implemented in a series of steps throughout 2014. The end goal is to extend financing to a broader pool of “underserved” borrowers — that is, responsible borrowers with less-than-perfect credit.
The “Blueprint for Access,” as it is know, emphasizes counseling for home buyers and clearer policy guidelines for lenders. HUD is also developing a new handbook for FHA loans, to make the program easier for both lenders and borrowers to understand. Here are some of the key components of this new program for home buyers.
Purpose of the New FHA Program
The “Blueprint for Access” is a multifaceted mortgage program with one overriding goal. According to HUD, this initiative is designed to “expand access to mortgage credit for underserved borrowers.” In other words, they are trying to make FHA-insured home loans available to more home buyers, particularly those who may not have qualified previously.
As mentioned, the new FHA program focuses on “underserved” borrowers. These are people who have minor credit problems in the past but are otherwise well-qualified to purchase a home and take on a mortgage obligation. And there are millions of people who fall into this category.
Consider the numbers: The average credit score for home loans solid into the secondary mortgage market is 752. But, as HUD officials point out, there are roughly 13 million Americans with scores between 580 and 680. These consumers meet the official credit requirements for the FHA program, but they are often turned down by the mortgage lenders who actually originate these loans. The new FHA program for 2014 is intended to make mortgage credit more available for these so-called “underserved” borrowers.
“Shutting these consumers out of the market hurts American families and undermines our efforts to build more stable communities,” HUD officials stated.
The HAWK Program: Counseling for Home Buyers
Counseling is a key component of the new FHA program for home buyers. HUD officials want to increase the use of approved housing counselors, in order to increase knowledge and awareness among home buyers. This phase of the program is known as Homeowners Armed With Knowledge, or HAWK.
The Department of Housing and Urban Development has actually offered counseling for years. They train and support a nationwide network of housing counselors. These services are available to borrowers for little or no cost, but they are frequently overlooked.
HUD wants to increase the number of consumers who undergo counseling, and with good reason. Mortgage delinquency rates for homeowners who have undergone counseling are 29% lower among first-time buyers, and 15% lower overall.
HUD and FHA officials are launching the HAWK initiative, a four-year pilot program, to increase the use of housing counselors. And they’re offering a pretty strong incentive. Home buyers who undergo an approved counseling session before signing a purchase agreement to buy a home could receive a 50 basis point (0.50%) reduction in their upfront FHA mortgage insurance premium (MIP), as well as a 10 basis point reduction in the annual premium. These reductions could add up to thousands of dollars in savings, over the life of the loan.
Providing Clear Guidelines for Mortgage Lenders
The new FHA program is meant to help home buyers make smarter choices about mortgage financing. But it doesn’t stop there. Blueprint for Access is also designed to provide clearer instructions and guidelines for the lenders who originate these loans.
HUD officials explained that mortgage lenders are often concerned about making underwriting mistakes, and the resulting enforcement that stems from such errors. So, as a protective measure, they tend to increase their lending standards above and beyond the FHA’s minimum standards. This is known as an “overlay.” These overlays make it harder for home buyers to obtain government-backed loans.
According to the fact sheet announcing this new program: “We want to work with lenders to provide clarity and transparency in FHA’s policies to encourage lending to qualified borrowers across the credit spectrum.”
Coming Soon: New FHA Handbook for Home Buyers, Lenders
The Department of Housing and Urban Development is also revising the official FHA handbook. This is a much-needed overhaul that, hopefully, will clarify their policies for lenders as well as home buyers.
The first section of the new handbook was posted for review in October 2013. Throughout 2014, HUD will publish additional sections of the new book, including appraisal guidelines, condominium policies, loan-servicing procedures and more.
The purpose of the new handbook is to establish clear (or clearer) guidelines about the program, so that mortgage lenders can “confidently originate loans for a larger number of FHA-eligible borrowers.” In other words, they want to remove some of the fear of back-end enforcement and financial losses, so that lenders will offer financing to a broader pool of home buyers.
What Does the New Program Mean for Home Buyers?
How will the new FHA program affect home buyers in 2014 and beyond? That’s the million-dollar question. In truth, it’s much too early to say. HUD’s goals for the new program are clear. They want to expand access to mortgage financing among underserved borrowers, such as those with less-than-perfect credit scores. They want to make FHA home loans available to a larger pool of responsible borrowers. That’s the government’s primary objective. But mortgage lender’s play a role here as well — and a big role at that.
The FHA does not lend money to home buyers. They insure the loans made by banks, credit unions, and mortgage companies that operate in the private sector. These lenders can establish their own guidelines for borrowers, using their own criteria. They are the first obstacle along the path to FHA financing, and sometimes the last. HUD’s goal with this new program is to encourage lenders to offer financing to well-qualified borrowers, even if they have a few credit issues in their past. So if the program works as intended, it could put previously out-of-luck borrowers on the path to a government-insured home loan.
Here is a timeline issued by HUD earlier this week, which outlines the various stages and implementation dates.
We expect additional details about the new FHA program for home buyers throughout 2014, and will update this story accordingly.