Major Changes to FHA Mortgage Guidelines are Good for Buyers

Federal Housing Administration (FHA) loans have filled in the gap for mortgage purchasers who have less than stellar credit.  Without FHA mortgages the real estate market would be losing value at a much faster rate than currently.

In October 2009, FHA announced that its capital reserve fund had fallen below the congressionally mandated level of 2 %.  The drop in capital reserves has lead Congress and the Administration to call for changes to strengthen FHA.

On January 20, 2010, FHA announced major changes to ensure its long-term financial soundness.
FHA is trying to balance three fundamental objectives: 1) financial soundness of the FHA insurance fund, 2) fulfilling its mission of serving borrowers not adequately served by the private sector and 3) facilitating the recovery of the housing industry and the over-all economy.

By all accounts the new changes are a victory for home buyers.  FHA has carefully balanced the need to make financial reforms with the need to keep FHA available to a large segment of consumers.  This is evident by retaining the 3.5 % minimum down payment requirement and allowing the upfront mortgage insurance premium to be financed.

FHA announced changes in the following areas: 

• The upfront mortgage insurance premium (UFMIP) will increase to 2.25% up from 1.75%. Contrary to reports, FHA will continue to allow the financing of the UFMIP.
• Borrowers with a credit score below 580 will be required to have at least a 10% down payment.  The minimum down payment will remain at 3.5% for all other borrowers.
• FHA will seek legislative authority to increase the annual premium (currently capped at .55%).  Over time, increasing the annual premium may allow FHA to reduce the upfront premium.
• Seller concessions will be reduced to 3% from 6%.

FHA will make the following lender enforcement changes:

• FHA will impelement credit watch terminations at lender underwriting.
• Public reporting of lender performance through scorecard system will be implemented.
• FHA will impelement, through notice and comment, indemnification against lenders. Indemnification will be expanded beyond fraud and misrepresentation.
• FHA will seek legislative authority to enforce indemnifications against direct endorsed lenders.
• FHA will seek legislative authority to sanction lenders nationwide based on performance of local branch.

FHA is an integral part to the continued recovery of the real estate industry and the overall economy.  The National Association of REALTORS (NAR) will continue to work with FHA, the Administration, and the Congress to ensure FHA can fulfill its mission while providing for the safety and soundness of the insurance fund.  NAR is committed to assisting FHA as it balances risk management with creating homeownership opportunities across the country.