FHA Loan rumors now become a reality – So what happened?
Wow... I just talked about some rumors that have been floating around for months about FHA loans. Let me make something clear. They are rumors to me until they are officially stated through HUD/FHA. And on that note, they are also rumors when you read blogs that actually state that they happened already, when it was still in discussion. Here is what I said yesterday.
FHA Loans Rumor Alerts - 3% seller concessions & FICO scores - Part 1 of 2
In our ever changing world of mortgages in the last several years, FHA made a few changes that were announced today, but there is no concern to panic, at least in my opinion. You can read it directly on HUD's web site.
FHA Announces Policy Changes to Address Risk and Strengthen Finances
*** The FHA Loan changes as of January 20, 2010 ***
So what are some of the major changes or possible changes in the near future and what impact could they have on the average homebuyer? (4 changes below)
- FHA Upfront Mortgage Insurance Premium - Known as UFMIP - This is what gets added to your loan amount after your down payment is subtracted from your purchase price or your base loan amount of what you are refinancing. The old amount was 1.75% for purchases and refinances and 1.50% for all FHA streamline refinances. It will now be raised to 2.25%. HUD is also requesting that Congress increase the annual premium, which is your monthly mortgage insurance. Currently it is .55% and .50%, depending on your LTV position. This change will not take place until the spring. (more on this below)
Example of the UPMIP change - Sure, it will hurt some, but that extra 1/2% on the total does not change the payment as much as you think it does. On a $300,000 loan, you are talking about an additional $1,500. This equates to an additional $8 per month.- Not much to disqualify someone, depending on how high their debt-to-income ratio was initially pushed.
- FHA credit score and downpayment changes - As mentioned yesterday, FHA mortgages never had a FICO score (credit score) number. It still doesn't and here is where the rumors went wrong. FHA has raised their credit score requirement for 3.5% downpayments to 580. Previously, you needed to have a credit score of 500 or higher. I will talk about this difference in change tomorrow in Part 2. This change will not take place until early summer.
- Reduction in allowable seller concession from 6% to 3% seller help - Just basic mathematics... the buyer won't be able to get more than 3% from the seller to pay for their closing costs and pre-paids. This change will not take place until early summer.
- More awareness of FHA lenders perfromances - Basically giving the public more information and more access to this information. This can be found in # 4 under the new policy changes. New FHA policy changes
So why the changes and what do they do to you, the borrower?
As many of you know, HUD has been suffering major losses within their mortgage insurance pool. HUD just insures these loans. This is the money that is collected from the UPMIP and the annual monthly mortgage insurance (MMI). Here is some food for thought. HUD states this. "This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing."
FHA gets the Upfront Mortgage Insurance Premium (UPMIP) from the lender very quickly after the loan closes. This is upfront cash. But they want to shift some of this weight to the monthly mortgage insurance, claiming that it will reduce the total monies to the borrower. It is hard to argue this until we know what number they want to increase the monthly fee to. Once I know what the new percentage is, I will write a blog in regards to this shift to the MMI that in my opinion is smoke and mirrors. I will explain more in that blog.
Why change the credit scores to include a higher downpayment if you have a score below 580? This basically allows FHA to balance its risk, yet still give anyone the chance to obtain a FHA mortgage. But keep in mind, they would need 10% down. I will be talking about this in part 2, giving you a better understanding of how hard these types of loans will be to obtain and why.
Lastly, lowering the seller concession from 6% to 3%. This has been a long standing discussion that appraisal values were raised to cover the additional expenses to the borrower, allowing the seller to pay for them. This effort also tries to keep those agreement of sale contracts from changing to a higher purchase price, just to cover such costs as mentioned above.
Keep in mind, there will be a new FHA mortgagee letter that will be out officially tomorrow, giving more detail.....and that this is not 100% official until the mortgagee letter is published. And as mentioned, the next step for HUD is to get congress to act on increasing the annual monthly mortgage insurance, which is known as MMI.
Important Reminder – be very careful of what articles you read about FHA loans. Several articles came out late yesterday, before HUD posted their own information. I have already read one article that was missing 1 of the 4 changes. And one article was giving bad opinion and advice, in my opinion, based on their lack of knowledge and experience in the mortgage industry. Keep in mind, they are just journalists trying to get some sort of news to the public as soon as. The new mortgagee letter will be out tomorrow. – 1/21/10
FHA Loans Rumor Alerts - 3% seller concessions & FICO scores - Part 1 of 2
FHA Loans Rumor Alerts - You don't need 10% or 20% down & more about credit scores - Part 2 of 2 (not truly all about part 2, but I do go into discussions about the credit scores - because of the recent FHA changes, I didn't get into great details about 10% or 20% down)
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For more information on FHA loans, please go to this link. The FHA Expert
For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit
For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags!
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