What is FHA Changing & Why

In response to the phone calls and emails I received over the past 24 hours, I thought I would put together this very quick post on FHA's recently announced changes. First let's cover why FHA needed to make these changes. FHA has a serious capital reserve shortage which needs to be fixed if they are going to continue to insure new mortgages and prevent the tax payers (you & me) from having to bail them out too. This capital reserve covers the losses on the home loans FHA insures and is currently strained due to defaults. FHA's reserve funds have declined to .53% of its insurance guarantee, which is far below the 2% required by Congress and the 3% it had during the fall of 2009. FHA loans have been a great source of financing for many including more than 50% of the first-time buyers in 2009, over a third of all new mortgages in 2009 and more than 20% of the refinances in 2009. When taking into consideration the massive volume of home loans insured by FHA, you can see the importance of making sure their reserve funds are balanced and that they have the ability to insure new mortgages in the future. Could you imagine where our housing market would be sitting today if 50% of the first-time buyers were not able to buy a home in 2009? We all need FHA to remain functional!

Here are the changes announced on Wednesday and how I feel they will impact our home buyers and housing market:

1. Up-front MIP increased from the current 1.75% to 2.25% - This change will take place some time during the 2nd quarter of 2010. How this translates to the home buyer is: On a home loan of $300,000 the home buyer would end up financing an additional $750 into their loan amount. If the interest rate were 6.0% there would only be an increase of $4.50 per month to the mortgage payment. I would consider this to be of low impact to the home buyer.

2. HUD has put in place a minimum credit score of 580 for the 3.5% down payment -  This change will go into effect this summer. Most investors raised their minimum credit score to 620 in 2009 so I don't see that FHA's minimum 580 score requirement impacting the market. In fact, the average FHA buyer has a credit score of 693. We are expecting most investors to further increase their minimum credit score requirement to 640 by the end of the year. FHA's recent changes will allow a home buyer with a score of less than 580 to purchase a home but only with an increased down payment of at least 10%. While FHA will insure this type of loan, a home buyer would find it very difficult to find a mortgage company who would be willing to take on that risk.

3. Maximum allowed seller concessions moving from 6% down to 3%. Seller concessions are used most often by the home buyer to cover their closing costs. While I believe this will have some effect, it will be minimal. It's rare that I see closing costs exceed 3% of the purchase price. There are some cases when extra "points" have to be charged to reduce the interest rate on a loan so that the buyer can qualify but in most cases this practice isn't used. Paying points to reduce a rate usually takes 6 to 7 years to make up the coast and most first time buyers are out of the mortgage within 3 to 5 years. I would consider the use of these funds to be a waist of money.

4. FHA announced they plan to clamp down on lenders offering FHA mortgages.

The agency is going to work more closely to monitor their performance as well as seek legislative authority to require mortgage firms to assume liability for all loans they originate and underwrite. I see this change having the highest impact of all the changes. While FHA will have their own set of requirements, we are going to see lenders tighten their standards beyond the FHA guidelines due to concern of having to buy back poor performing loans. Hence the already tighter credit score requirements of 620 with most lenders which is expected to hit 640 by the end of the year.

Some economists fear that FHA's recently announced changes will make home buying more difficult thus slowing the housing market further, while other economists feel that FHA's changes will have little impact to the home buyer. My opinion, for whatever its worth is: Home financing is easier today then it will be in the very near future, rates are still low today but expected to increase, and the $8000 and $6500 tax credit is still available for a few more months....... NOW IS THE TIME TO BUY! I realize that I continue to say this but I deeply believe that anyone who can and does buy real estate now will be very happy they did once 2012 rolls around. Buy low and sell high!

HUD has stated there will be additional press releases between now and the end of the month with more changes. In my commitment to be your source for mortgage information, I will continue to keep you updated as I learn of it.

All my best -

Michelle Coolidge

206-909-3930

Comments

[clagsageldTew]

For the help please use http://www.google.com