January 30, 2010

FHA Changes Loan Guidelines … it’s not that bad

When it comes to financing a home in today’s market, buyers have two basic choices … a conventional loan or a government insured FHA loan. Borrowers who can’t meet the higher down payment and credit score requirements for conventional financing are finding success qualifying for an FHA loan.

With the appointment of David Stevens as Commissioner to FHA last year, the agency has begun to implement policies designed to reduce risk from loan default, increase capital reserves and weed out fraud. I like it! Home buyers will see changes to popular FHA loan features in the coming months that include:


INCREASE UP FRONT MORTGAGE INSURANCE PREMIUM (UFMIP)
This policy change has been approved for purchase transactions effective on or after April 5, 2010. The fee will increase from 1.75 percent to 2.25 percent of the base loan amount. Rather than pay this fee out of pocket, most homeowners choose the option of adding it to the loan amount and finance over the loan term. Let’s run some numbers to see what impact the fee increase will have. Assume a $200,000 base loan plus UPMIP financed, 5.0 percent rate, 30 year amortization:


1.75 percent UPMIP is $3500 and = monthly principal & interest payment of $1092

2.25 percent UPMIP is $4500 and = monthly principal & interest payment of $1098

So the mortgage payment goes up a whooping $6 bucks a month. Not a deal breaker. Two additional program changes were announced but DO NOT have effective dates yet. FHA said we should expect implementation some time this summer. They are:

REDUCE SELLER CREDITS FROM 6 PERCENT TO 3 PERCENT
During the buyers market in California, it was common to negotiate seller credits of 3 to 4 percent and use them to offset buyers closing costs. Now that the market has shifted in favor of sellers, buyers would celebrate a 3 percent credit. I don’t see this change keeping buyers out of the market.

MINIMUM FICO SCORE INCREASE TO 580
To qualify for FHA’s minimum down payment of 3.5 percent, a borrower will need a qualifying FICO score of 580. Here’s the thing … even though FHA has a 580 FICO score requirement, most lenders who fund FHA loans have increased their minimum FICO score to 640. In my opinion … if you have a FICO score below 600, you have no business buying a home.

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