They’re at it again. The Federal Housing Administration (FHA) recently announced a series of changes to the FHA loan program.
The new rules and regulations are designed to shore up the agency’s capital reserves, which became severely depleted during the housing crisis. This is the latest in a series of new rules that will affect FHA borrowers in 2013.
Tough times call for tough measures.
A congressional mandate requires the FHA to maintain capital reserves above a certain level, in order to cover foreclosure-related losses. By law, the Federal Housing Administration must maintain capital reserves equaling, at a minimum, 2% of its insured loan portfolio. Last year marked the fourth consecutive year that they have failed to meet this requirement.
At the end of 2012, an audit revealed that the mortgage-backing agency had completely exhausted its reserves, falling into negative territory. They are now scrambling to recover from these losses, partly by introducing new rules and regulations on FHA loans.
2013 Brings New Rules for FHA Loans
In 2012, the FHA took steps to rebuild its reserves, namely by raising the insurance premiums it charges on the loans it insures. But those efforts were not enough to overcome mounting losses from foreclosures. The latest round of new rules, announced in January 2013, are part of an ongoing effort to keep the agency afloat. Here is a summary of the latest regulations and rule changes for FHA loans:
1. FHA Mortgage Insurance Premiums are Going Up
When you use an FHA loan to buy a house, you will be required to pay for mortgage insurance. There are two types of mortgage insurance premiums (MIPs) associated with these loans — the annual MIP, and the upfront MIP. A new rule for 2013 will bring higher premiums for borrowers using this government program.
The FHA has announced it will raise the annual premium on most new mortgages by 10 basis points, or by 0.10 percent. For jumbo loans, which are defined as $625,500 or more, the premium will go up by 5 basis points or 0.05 percent. Certain loans, such as the FHA streamline refinance, will be exempt from these changes.
Additionally, borrowers who use FHA loans will now be required to pay the annual MIP for the life of the loan. In the past, the annual premium could be cancelled when the loan’s outstanding principal reached 78% of the original principal amount that was borrowed.
An internal review showed that the agency has been losing significant revenue because of this policy, while still retaining the risk of each loan through its entire life. So the policy is being changed. The new FHA rule for 2013 states that borrowers will have to continue paying the annual MIP for the “life of their mortgage loan.”
- This new regulation will apply to FHA loans with case numbers assigned on or after April 1, 2013.
- Refer to HUD Mortgagee Letter 2013-04 for more information.
2. Manual Underwriting for Borrowers with Credit Scores Below 620
In 2013, borrowers with credit scores below 620 and combined debt ratios above 43% will face additional scrutiny. Such borrowers can no longer be automatically approved through TOTAL Scorecard, the FHA’s automated underwriting system. Instead, borrowers who fall into this range must be carefully reviewed by a human underwriter. Lenders must find and document compensating factors to support their approval of such borrowers.
A list of compensating factors can be found in HUD Handbook 4155.1, Section 4.F. Compensating factors include a larger down payment (10% or more), substantial cash reserves, or a history of making mortgage payments equal to or greater than the payments on the new loan. Having an excellent credit history / score will also work in the borrower’s favor.
- This new rule will apply to FHA loans with case numbers assigned on or after April 1, 2013.
- Refer to HUD Mortgagee Letter 2013-05 for more information.
3. Larger 5% Down Payment Required on FHA Loans above $625,500
For most FHA loans, the minimum down payment is 3.5% of the amount borrowed. This is what the borrower has to pay, in order to be approved for the program. It’s an appealing feature that attracts many borrowers to the program in the first place. A proposed new rule would raise the down-payment requirement for larger mortgages.
If enacted, this rule will apply to “jumbo” mortgages with original principal balances higher than $625,500. For a loan of that size, the borrower would be required to make a down payment of at least 5% of the amount borrowed. We expect to hear more on this subject within the next few days. FHA officials said they will release additional details in a forthcoming Federal Register Notice.
4. FHA Loans after Foreclosure: Three-Year Rule + Good Credit
Update, September 2013: HUD shortens post-foreclosure waiting period to 12 months for some borrowers.
This is not so much a new rule as a tighter enforcement of an existing rule. The Federal Housing Administration, and its parent organization the Department of Housing and Urban Development (HUD), have specific rules about using an FHA loan after a past foreclosure.
In short, the rule states that borrowers may be eligible for an FHA-insured mortgage “no sooner than three years after they have experienced a foreclosure.” But the borrower must have rebuilt his or her credit score since the foreclosure took place, and must meet all other requirements for an FHA loan. In other words, the three-year rule is only a minimum requirement.
An investigation found that some lenders were engaging in misleading advertising, by telling borrowers they could “automatically” qualify for FHA loans after the three-year mark. Officials state this is not true, and that borrowers with a previous foreclosure must be fully reviewed in accordance with current underwriting requirements. There is no “automatic” approval at the three-year mark.
Over the coming weeks, we expect to receive additional information regarding FHA loan rules and regulations for 2013. There is even talk of a bailout for the troubled agency. But that’s another story entirely.