FHA Changes Could Make it Harder to Get a Loan

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The Federal Housing Administration is bleeding cash -- and that could make it harder for borrowers to get FHA-backed loans, which have been a refuge for borrowers and lenders alike in the downturn. The FHA is supposed to hold a cash reserve of 2 percent, but it fell to just 0.5 percent in the last quarter because of foreclosures and delinquent payers. To raise more funds, the FHA is tightening its requirements. The result is that borrowers will likely need more up front cash, have a harder time qualifying for FHA-backed loans, and will find fewer lenders to choose from.

Following are some changes announced at a Congressional hearing on Wednesday:

  • You will need to put more money up front. Right now you can put down as little as 3.5 percent, but that will likely rise to about 5%. Private lenders today require between 10% and 20%. Most want 20% unless your credit score is above 750. The FHA has not yet determined what the new down payment requirements will be.
  • You will have to pay more in insurance premiums. Right now that premium is 1.75% of the loan value plus 0.5% or 0.55% per year. HUD Secretary Shaun Donovan asked Congress for authority to raise the upfront premium.
  • You may will get less help with closing costs. Right now sellers can pay as much as 6% of the home's value in closing costs. The maximum level will be lowered to 3% and may go even lower.
  • You will need better credit scores. Right now the score can be as low as 500. While that's the law, lenders don't usually accept scores that low. The FHA is researching what that minimum score. This may not be as noticeable as the other changes because most lenders do expect a higher score, but this change will prevent abusive lenders from lending to unqualified borrowers.
In addition to these changes for buyers, the FHA is also tightening the rules for lenders, so fewer lenders means less competition and likely higher closing costs. The two key changes for lenders will be that FHA-approved mortgagees will have to assume liability for all the loans they originate and/or underwrite and mortgagees will also need to have higher net worth, which will likely reduce the number of mortgage brokers who can compete for your business. With less competition, costs for closing a loan will likely go up.

If you are thinking about an FHA loan, be sure to price out non-FHA loans as well. If you have the cash and a high enough credit rating, you will likely find the non-FHA loan cheaper if these changes go into effect. But, if you don't have at least 10% to put down and a credit score over 700, you'll likely need to use an FHA loan to buy a house.

The FHA was created in 1935 to help finance homes for returning veterans, but grew into a popular program that has helped millions of individuals and families buy homes.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying Foreclosures.
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