Doing the Charleston!

TO THOSE OF YOU WHO PLAN TO USE AN FHA LOAN TO TAKE ADVANTGE OF THE $8000 OR $6500 HOME BUYERS TAX CREDIT, THIS IS VERY IMPORTANT NEWS!

The Federal Housing Authority (FHA) outlined mortgage loan policy changes in late January that will affect home buyers in the very near future. The new polices are meant to reduce the government group's portfolio risk and strengthen it financially overall. FHA is experiencing record-high delinquency rates on single-family mortgages. This has sent the number of claims FHA has been forced to pay out skyrocketing, and left its capital reserve fund depleted – falling below what’s required by law for the first time since the agency was formed.

What these policy changes mean are higher costs for home buyers using FHA loans, beginning in spring/early summer of this year. The new policies are more detailed in FHA’s official announcement, but the basics of the changes are:

¨    The upfront mortgage insurance premiums, collected at closing, are increasing from 1.75% to 2.25%.

¨    If a home buyer’s FICO score (credit report score) is below 580, a minimum of 10% down payment will be required, instead of the 3.5% minimum down payment homebuyers have come to expect on an FHA loan.

¨    The amount of money that sellers can kick in for homebuyers/borrowers – typically in the form of closing costs – will drop from 6 percent to 3 percent of the home’s value.

If the increase in upfront mortgage insurance premiums is a major cause of concern for you, it is worthwhile to note that FHA has asked Congress to allow it to raise the maximum annual premiums that borrowers can be charged. If allowed, it will shift some of the premium increase from up-front (paid at closing), to the monthly payments made by the borrower over the life of the loan.  FHA says this will allow it to increase needed capital reserves with less impact to the consumer. However, either way, it can possibly make or break whether a home buyer qualifies for a loan.

Homebuyers should expect underwriting to be tougher in 2010 as well.  FHA’s mission is to provide affordable financing to families that need it, but it must also manage the risk that comes with insuring lesser-quality loans. This spring, FHA approved lenders will have to assume liability for all the loans they originate and underwrite. If a lender produces an unacceptable number of bad loans, FHA can withdraw their approval as a lender nationwide, even if only one of its regional branches is at fault. As a result, even though FHA is allowing 580 FICO scores, many banks are already making 620 the minimum FICO score they will accept.

The FHA's new guidelines don't go into effect until spring (the exact date has not been announced), until then the old guidelines will apply.  If you plan to buy a home with an FHA home loan, and these new guidelines will effect your ability to do so, your #1 priority should be finding the home you want to buy, and closing on it before spring/early summer of 2010.

If I can assist you in any way toward that goal, or need more information, please don’t hesitate to contact me.

Information contained in above commentary was compiled from information on the HUD website.