FHA Changes On The Horizon

By: Scott Swinford Last Updated: January 25, 2010

FHA just announced that there will likely be some changes to their requirements for insuring loans effective April 5, 2010. The main ones include an increase in the upfront mortgage insurance premium (UFMIP) and a decrease in seller concessions from 6% to 3%.

For those who don’t know what UFMIP is, it is the “downpayment” that a buyer makes on the mortgage insurance when they use an FHA insured loan. This payment, which can be financed, helps keep down the monthly cost of mortgage insurance.

For reference, conventional loans have mortgage insurance (MI) for any loan that is greater than 80% of the value of the property being used as collateral. The MI had become somewhat expensive for borrowers with sub-700 credit scores, causing some borrowers to take out 80-20 loans in the past to avoid it. Because of the losses to lenders over the past couple years, there are very few new loans written like this.

FHA charges a premium up front of 1.75% of the loan amount which can be financed into the loan itself and then a monthly charge of 0.55% each month for 5 years or until the loan-to-value automatically reaches 78%, whichever comes last. This premium is set to increase to 2.25%. On a $150,000 loan, the amount borrowed will increase by approximately $750.

As far as seller concessions, a decrease in the amount allowed could have an impact on the amount of cash required to be brought to closing by the borrower. For example, a Realtor may have submitted a purchase offer on a home for X amount and asked for the seller to pay for “closing costs, prepaid items and upfront mortgage insurance premium”.

In the past on larger loan amounts, 3% would often cover these costs, and the borrower would only need to have the required minimum 3.5% downpayment. Now, with the increased UFMIP, 3% will not cover the costs. Since it can be financed into the loan, this is generally not a deal breaker.

This becomes more of an issue on lower cost homes because the insurance, the title company fees, lender fees, processing fees, appraisal fees, etc., are for the most part fairly fixed and do not vary much on the price of the home. In other words, the fees to close a $300,000 home may only be a few hundred dollars more than the fees to close a $60,000 home. Being that 3% of those numbers is $9,000 and $1,800 respectively, someone buying a lower priced home (who may be doing it due to financial constraints), may be required to bring cash to the closing, in addition to the downpayment, to make up for the shortfall.

There are a couple other proposed changes such as a required 10% downpayment for borrowers with credit scores below 580, but this is currently a moot point, as I know of no lenders who will make an FHA loan on a score under 620.

You can read the Wall Street Journal’s take on this here or see the HUD press release here for some of the other pending changes. For those who don’t know what UFMIP is, it is the “downpayment” that a buyer makes on the mortgage insurance when they use an FHA insured loan. This payment, which can be financed, helps keep down the monthly cost of mortgage insurance.

For reference, conventional loans have mortgage insurance (MI) for any loan that is greater than 80% of the value of the property being used as collateral. The MI had become somewhat expensive for borrowers with sub-700 credit scores, causing some borrowers to take out 80-20 loans in the past to avoid it. Because of the losses to lenders over the past couple years, there are very few new loans written like this.

FHA charges a premium up front of 1.75% of the loan amount which can be financed into the loan itself and then a monthly charge of 0.55% each month for 5 years or until the loan-to-value automatically reaches 78%, whichever comes last. This premium is set to increase to 2.25%. On a $150,000 loan, the amount borrowed will increase by approximately $750.

As far as seller concessions, a decrease in the amount allowed could have an impact on the amount of cash required to be brought to closing by the borrower. For example, a Realtor may have submitted a purchase offer on a home for X amount and asked for the seller to pay for “closing costs, prepaid items and upfront mortgage insurance premium”.

In the past on larger loan amounts, 3% would often cover these costs, and the borrower would only need to have the required minimum 3.5% downpayment. Now, with the increased UFMIP, 3% will not cover the costs. Since it can be financed into the loan, this is generally not a deal breaker.

This becomes more of an issue on lower cost homes because the insurance, the title company fees, lender fees, processing fees, appraisal fees, etc., are for the most part fairly fixed and do not vary much on the price of the home. In other words, the fees to close a $300,000 home may only be a few hundred dollars more than the fees to close a $60,000 home. Being that 3% of those numbers is $9,000 and $1,800 respectively, someone buying a lower priced home (who may be doing it due to financial constraints), may be required to bring cash to the closing, in addition to the downpayment, to make up for the shortfall.

There are a couple other proposed changes such as a required 10% downpayment for borrowers with credit scores below 580, but this is currently a moot point, as I know of no lenders who will make an FHA loan on a score under 620.

You can read the Wall Street Journal’s take on this here or see the HUD press release here for some of the other pending changes.

You can read this article and other articles from Scott Swinford on his website.