Beginning in the spring of 2010 and continuing into the summer, The Federal housing Administration will be tightening the lending policies of one of the most highly sought mortgage loans in the country. FHA insured loans currently comprise about 30% of all new mortgages originated in the United States, up from only 3% just 3 years ago, cites a recent USA Today article.
So in a nutshell, here are some of the more relevant changes:
- Credit Scores increase – to qualify for a 3.5 percent downpayment, the hallmark characteristic of an FHA loan, borrowers must have a credit score of at least 580. Failing to achieve the 580 mark will not eliminate the possibly of obtaining an FHA loan, but it will increase the required downpayment to 10 percent.
- The limit on Seller contributions toward closing costs, currently 6 percent of the total sale (a amount generally sufficient to cover most to all of the buyers closing costs), will decrease to 3 percent. This is a return to a previous standard, and still offers substantial assistance to Buyers, but will in the end require the Buyer to show up with more cash at the closing table in the future than is currently needed. The purpose of this change is to help contain appraisal values. When Seller contributions are large, the value of the home must appraise for the sales price of the home plus the Seller contributions. By reducing the amount of the Seller contributions, the FHA hopes that appraisals will begin to more accurately reflect market conditions.
- The amount of prepaid mortgage insurance will rise to 2.25 percent, up from the current level of 1.75 percent.
So what’s the desired point behind all of these changes?
The quick answer is that these changes are the next attempt by the FHA to help stabilize the housing market in the United States. “These changes are overdue,” said David Stevens, the FHA commissioner, speaking to reporters. “FHA has a responsibility to be fiscally sound” and to provide homeowners with “financing that’s going to give them the ability to live in their home long term.”
The Wall Street Journal also reports that the FHA is also announcing a series of measures to boost its ability to police lenders that originate loans with FHA backing, and the agency will ask Congress for greater authority to take action against lenders who originate loans with high rates of default.