Sunday, January 24, 2010

FHA Changes are Coming

FHA will be taking measures to address their risk exposure and strengthen their finances by announcing policy changes that will affect future FHA loans. FHA reserves have fallen below the federally-mandated level, and FHA needs to raise capital quickly so they can continue to insure mortgages.

Effective April 1, the Up Front Mortgage Insurance Premium (MIP) will increase from 1.75% to 2.25% of the loan amount. The Up Front MIP is added to the loan amount, and is being restored to its previous level.

In early summer, all FHA borrowers must have a minimum credit score of 580 in order to qualify for minimum down payment of 3.5%. Borrowers with scores less than 580 will be required to make at least a 10% down payment. Can you believe that people with under 580 credit scores are currently buying houses? Some lenders have already established their own credit standards. For example, Fairway Mortgage will not lend money to people with credit scores under 620. Even that seems too risky to me. A score over 720 is considered excellent, and 800 is the maximum possible credit score.

Also in early summer, allowable sellers concessions will be reduced from the current 6% of sale price to 3%. Seller concessions are seller contributions to the buyer's closing costs and amounts pre-paid into escrow accounts.

You may think this doesn't pertain to you because you don't plan to get an FHA loan, but as credit tightens up, we will see fewer borrowers qualifying for loans. This could result in a reduction in demand for houses. What happens when we have high supply and low demand?

The last of the most recent changes affects investors who buy a house to fix and flip. Currently, the investor can't sell a house to an FHA buyer until 90 days after the investor purchased it. This is supposed to prevent buyers from paying too much for a house, but I think if the house has been fixed up, it is worth more, and the investor deserves to be rewarded for providing livable housing to the market.

Anyway, the 90 day rule will be waived by FHA effective February 1. Again, lenders can make up their own rules. I recently sold a house that an investor had fixed up, and the lender required three appraisals because less than six months had passed between the investor's purchase of the house and the buyer's offer. This wasted time and money for both the buyer and seller, but lenders are very afraid of making a bad loan, so they want everything squeaky clean.

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