I have heard a lot of buzz already this morning with the recent announcement from FHA about their guideline changes. Many folks have a “the sky is falling” attitude about this, and frankly, I don’t think it’s that big of a deal.

First off, the FHA has been a savior to the mortgage and housing market over the last year or so. In many cases, it has been one of the only viable options to help folks purchase with little or no down payment. And keep in mind, the FHA does not make loans, they only insure loans for lenders, such as WestStar Mortgage, in case of delinquency or default. The are more of a “foreclosure insurance company”.

The FHA has been faced with increased delinquencies and falling reserves, and to ensure their ability to continue to offer a strong and stable mortgage program, they are forced to make some changes.

Here are the changes, what you should know about them, and why we will still be OK:

Increased Mortgage Insurance Premiums
The FHA is increasing their up-front mortgage premium from 1.75% to 2.25% of the loan amount. They need to add additions funds to the pot to help cover defaults. This change will better fund the FHA mortgage program and help it continue to exist.

Why this is OK:
This fee is financed on top of the mortgage, so it does not impact the buyer’s cash out of pocket for closing, and has very little impact on monthly payment. Also, the VA’s funding fee is typically 2.2% to 3.3%, so they are really just coming in line with the current up-front cost of a VA mortgage. So, not that big of a noticeable difference here.

Lower Seller Contributions
The FHA has been concerned about a buyer’s investment into the purchase of a property. The new rules limit the seller contribution to 3% of the purchase price, down from 6% previously. The alternative to this was an increase to the down payment requirement, and that would make it tougher to buy a new home.

Why this is OK:
In many cases, especially as you get to higher purchase prices, 3% is often enough to cover closing costs. If is not, your loan officer has options to still make the deal work. Those can include:
Increasing the interest rate a bit and crediting back funds from the lender for closing costs
Getting a gift from a relative, that can cover down payment, closing costs, and pre-paids
Utilizing the VHDA FHA Plus or Homebuyer Tax Credit Plus to finance up to 5% of the purchase price for down payment, closing costs, and pre-paids
Utilizing the USDA mortgage program with:
No down payment
No limit to seller contributions
No mortgage insurance
Can finance all closing costs and pre-paids up to the appraised value

Increased Down Payment and Credit Score Requirements
The FHA has increased their minimum credit score requirements to 580 or higher. Borrowers with a credit score below 580 now must make a 10% down payment.

Why this is OK:
Most lenders already require a minimum of a 620 credit score to qualify for an FHA mortgage, and some are even higher than that. This rule will have little practical effect since the average FHA credit score has been running at about 693. I see no impact whatsoever on getting buyers qualified due to this change.

So, at the end of the day, these are some changes to help sure-up the FHA insurance program, and help ensure it continues to be available for years to come. With the assistance of a really good mortgage partner, these changes should have little or no impact on your ability to qualify and close buyers.

Have a great week, and make the best of 2010!
Kevin
757-645-8996

PS: Want to qualify more buyers and close more sales? Have your clients give me a call. With almost 16 years of mortgage lending experience and billions of dollars of mortgages originated, there is not much I have not seen.

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