Wednesday, January 20, 2010

Big Change in FHA Loan Requirements

The The Federal Housing Administration (FHA) has made some big changes to their loan policy. First off, just so everyone understands the FHA does not make loans, but rather offers insurance against default so lenders have a fallback position. The cost of the mortgage insurance is passed along to the homeowner and typically is included in the monthly payment.

Unlike conventional loans that adhere to strict underwriting guidelines, FHA-insured loans require very little cash investment to close a loan. There is more flexibility in calculating household income and payment ratios. In most cases, the insurance cost to the homeowner will drop off after five years or when the remaining balance on the loan is 78 percent of the value of the property -whichever is longer.

FHA loans are popular because borrowers are only require a down payments of 3.5 percent of the purchase price, that requirement did not change.

The new policies announced today are designed to bring more revenue into the agency, while at the same time keeping loans available. FHA's popularity has grown and the agency is seeing dramatic financial pressure with the increase of foreclosures (the need to payout on bad loans) and the increase in popularity of the FHA loan. The FHA has seen an increase of popularity in this product they now back nearly 30 percent of loans.

The changes:
Borrowers pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent. A home buyer will still be able to wrap these fees into the total amount borrowed. FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge.

Need a credit score of at least 580 to qualify. Borrowers with a score lower than 580 will need a down payment of at least 10 percent.

For California and our local Alameda housing market this will make it more difficult for first time buyers that have little for a down payment. If they have a poor credit score they may not be able to buy at all, and for many this is a good thing. People who could not afford houses over the past five years were getting loans they could not afford.

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