FHA Tightening Lending Guidelines for Home Buyers

The Federal Housing Administration (FHA) announced last week that it will be raising it’s down payment requirements for borrowers.  It will also be raising the monthly mortgage insurance that is a requirement of their loans.  All of this is being done to address the risk in the mortgage and housing markets and to make sure that the FHA remains financially solid and maintains its long-term ability to guarantee affordable mortgages for families.

The FHA issues about 33 percent of all new mortgages and is the largest single source of lending for home purchases.  FHA Commissioner David Stevens says the tighter lending standards are significant, but not overwhelming for most borrowers.

Beginning summer of 2010, borrowers with a credit score lower than 580 will have to put down at least 10 percent to qualify.  Borrowers with higher credit scores will still qualify for the FHA’s 3.5 percent down payment program.  FHA home buyers will also be limited in how much money they can get from sellers toward closing costs, dropping from 6 percent to 3 percent of the purchase price; this will bring FHA into the same standards that Fannie Mae and Freddie Mac currently have.  And if Congress approves, borrowers will have to pay 0.5 percent more for insurance premiums.
This premium will rise from the current 1.75 percent of the loan amount to 2.25 percent. This change would apply both to the up-front and the annual premiums FHA charges.  Also, FHA does not make the mortgage loans itself.  Instead, FHA provides a government guarantee against the default for a mortgage issued by an FHA-approved lender. On an FHA loan, the mortgage insurance is split between an up-front charge paid at your closing and a yearly charge. The yearly charge is broken down each month for ease of payment by you as the borrower. This new mortgage insurance rate will go into effect in the spring.

Many lenders have already tightened their lending standards above what those that had been in place for FHA.  So many of these changes won’t be completely new for borrowers because they’ve been out in the marketplace for the last several months.

For more information on these changes or to see if you qualify for an FHA mortgage at 3.5%, please contact me.

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What are your thoughts about these FHA changes?  Please post a comment below.

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