HUD Proposes Changes to FHA Loan Program

The US Department of Housing and Urban Development (HUD) announced today that it is planning to make some changes to its FHA loan program. Hmm…the announced changes include:

– Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending. Per HUD’s press release, “the first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.” This change will supposedly take place this coming Spring 2010. Eventually, they plan to shift this from an up-front fee increase to an annual premium increase. What does this really mean, in plain english? The FHA mortgage insurance premium is paid by the buyer up front, however the cost is financed into the loan. For example, if your purchase is for $300,000, your “base” loan amount after your 3.5% downpayment is approximately $289,500…the MIP is added to the base mortgage loan amount. Currently, MIP is approximately 1.75%. This would add approximately $5,066.25 to your financed loan amount, making your total financed purchase approximately $294,566.25. With this change, with the MIP being raised to 2.25%, this would add an additional $1,447.50, for a total financed amount of $296,013.75…a difference in monthly payment of about $10 depending on the interest rate?

– Update the combination of FICO scores and down payments for new borrowers. Per HUD’s press release, “new borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA‘s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.” This change will supposedly take place this Summer 2010. What does this really mean, in plain english? Candidly, I really do not anticipating this having a huge impact on FHA lending as it exists. Until now, there has been no minimum FICO score requirement imposed by HUD, however, lenders who fund FHA loans have imposed their own “overlay” requirements. I do not know of ANY lender who currently will fund an FHA loan for a borrower with a credit score below 580 (and really, that number is probably 620). I just hope lenders do not create new “overlay” requirements that raise downpayments for borrowers with credit scores under, say, 640 or something…

– Reduce allowable seller concessions from 6% to 3%. Per HUD’s press release, “the current level [at 6%] exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.” This change will supposedly take place this Summer 2010. What does this really mean, in plain english? Candidly, this does suck (for lack of a better way of saying it). While I think it is pretty rare to see a buyer ask for a 6% seller concession (aka, a credit for buyer‘s closing costs), it is not uncommon to see a buyer ask for 3.5%, or 4% to cover their closing costs. Also, often times a credit will be negotiated after the buyer and seller are in contract to compensate for a repair or something of that nature…now ALL credits will be capped at 3%. Heck…many conventional loans allow more than 3%. It means that buyers will have to come into the transaction with more money…that concept is not a terrible thing, but all of the (probably unintended) consequences of limiting the seller concessions could be really crappy.

So what is the net effect of all of this? If you are an FHA buyer looking for a home, and these changes above will adversely affect your ability to purchase a home, you may want to get in gear and complete your purchase…or, start saving more money for your purchase. If you are a seller, and potential buyers for your home may be using an FHA loan (which in Sacramento, will be MOST sellers), get ready for these changes…you will be capped at a 3% seller concession, so throwing money at a transaction in lieu of repairs may not fly in some cases.