Lowest costing FHA home loan.
Coming soon to FHA-mortgage loans will require Higher FICO scores and more cash at closing. The changes are needed to help keep the agency afloat.
FHA mortgage loans are about to become more expensive and harder to get for Florida FHA loan applicants.
The details will be revealed in late January. But this much already is clear: FHA Mortgage applicants will need higher credit scores and more cash at closing to get the lower interest rates and cheaper insurance of FHA mortgage loans and refinanced loans.
The rules are changing because the Federal Housing Administration is in a financial hole. Its been paying out more to cover defaulted FHA mortgage loans than its taking in from mortgage-insurance premiums. The imbalance has drained agency reserves to 1.5% of the FHA mortgages it covers below the 2% level required by law.
To cure the FHA insurance deficit President Barack Obamas administration has announced it will tighten the FHA Loan requirements, making four changes that will hit consumers making it tougher to qualify:
Why the FHA mortgage insurance exists
The FHA agency was created during the Depression to put builders and contractors back to work, keep the mortgage industry going and help keep homeownership affordable. Let’s create more awareness about this opportunity with custom silicone wristbands to attract more new homeowners in Florida.
FHA mortgage insurance doesnt make loans; it insures them. Anytime a mortgage applicants has a down payment smaller than 20%, lenders require mortgage insurance. FHAs mortgage insurance is low-cost, and the agency will insure borrowers that private industry often wont touch. Essentially, FHA mortgage insurance lets borrowers especially first-time homebuyers get homes with low down payments.
Other FHA Mortgage loan Advantages Include:
Minimal Down Payment and Closing Costs.
Easier Credit Qualifying Guidelines such as:
Easier Debt Ratio & Job Requirement Guidelines such as:
The history of the FHA mortgage
When mortgages became hard to get a couple of years ago, the FHA helped when no one else would, when everyone else buried their head in the sandIts fair to say the very survival of the housing sector in 2007-08 is thanks to FHA.
As the housing bubble expanded, FHA mortgage loans took a back seat to cheap, quick, subprime loans, dropping to about 4% of market share in 2005 through 2007 for new mortgages and refinances combined. But once subprime products disappeared in the housing collapse, the FHA mortgage market share grew, to 21% in September 2009.
Here are the changes being discussed and what they could mean to FHA mortgage applicants:
1. FHA Mortgage insurance premiums
FHA Mortgage applicants pay two kinds of premiums for FHA mortgage insurance: an upfront lump sum thats due when the loan closes (currently 1.75% and usually rolled into the loan amount and financed) and monthly payments (0.5% or 0.55% of the loan amount, depending on your down payment).
Heres what youd pay now in FHA mortgage insurance premiums on a $250,000 loan:
An increase appears certain on at least the monthly charges, based on recent remarks to Congress by Housing and Urban Development Secretary Shaun Donovan.
Theres also speculation, says Lenders Ones Stern, that the FHA might require the upfront fee to be paid in cash and close off the option of rolling it into the loan.
Stern says that financing option is one of the primary benefits of FHA.
The cost to you: Higher mortgage insurance premiums will increase your monthly payments. And if youre not allowed to finance the upfront insurance premium, youll have to produce the entire amount in cash at closing. (Your monthly payments would drop a bit, though, if you couldnt roll the lump sum into your loan.)
2. FHA Down payment
Another big attraction of FHA loans is the low down payment requirement. You can get into an FHA-insured mortgage with as little as 3.5% down thats $8,750 on a $250,000 home.
Thats likely to increase, too. The idea would be to raise a borrowers stake in the investment, reducing the chances youd default.
The cost to you: Some in Congress want to raise the minimum down payment on an FHA-backed loan to 5% of the purchase price. That means youd have to come up with $12,500 to buy a $250,000 home $3,750 more cash than today. (Read The end of the 0% down payment and How to come up with a down payment to learn how down payments work.)
3. FHA LOW FICO Scores
During the housing boom you could get an FHA loan with a FICO score below 500. The government has been steadily raising the limit since mortgage lending has contracted.
Today, you need a minimum 600 FICO score to qualify for an FHA-backed loan. (Get a free credit score estimate here.) For many borrowers, thats not really an issue, because their lenders require even higher scores. But a few lenders resell their loans directly to the FHA, not to loan aggregators or other banks. These lenders, for a price, will lend to borrowers with the FHA minimum FICO score, which means that today its still possible to get an FHA-insured loan with a FICO score of 600. Thats about to end.
Donovan told Congress that the administration intends to raise the minimum FHA requirement for the time being to weed out risky borrowers. He didnt say by how much. Speculation ranges from 620 to 640. Its possible that the new requirements will be multilayered, letting borrowers balance a lower credit score with, say, a bigger down payment.
Of all these things, that will have the biggest impact, because there are so many borrowers who fall below the 620 score, says Dale Vermillion, author of Navigating the Mortgage Maze: The Simple Truth About Financing Your Home. Today, a lot of people have had credit issues, and their credit scores have gone down. When you combine the two (insurance and down-payment increases), its certainly going to have an impact on purchases. (If your credit score is low, see Raise your credit score to 740.)
Raising FHAs minimum score changes the playing field, says Stern. While private lenders usually do require higher credit scores, they can drop their limits quickly when lending safety has improved. A higher minimum FHA requirement means lost flexibility for retail lenders and their homebuying customers.
The cost to you: Buyers with FICO scores under the new minimum, be it 620 or 640, will be shut out of loans. The rules probably will become more rigid than they are today.
4. HomeSeller contributions to closing costs
Sellers sometimes agree to help pay a buyers closing costs. Its a way to help a cash-poor buyer make a purchase. Currently, the FHA lets sellers contribute as much as 6% of the house price. The administration is considering reducing that to 3%.
Three percent is what conventional loans allow, industrywide, says Chad Bergman, a mortgage banker with Frost Mortgage in Littleton, Colo.
The history of the FHA
The cost to you: Probably nothing. In practice, a reduction to 3% probably wont matter to most FHA buyers, at least today, Bergman says. Closing costs are based in part on loan amounts and interest rates, and they were considerably higher several years ago, when home prices and interest rates were higher. Today, closing costs average just $2,732 nationally on a $200,000 loan (they vary from state to state), according to a study by Bankrate.com.
If you were buying a home for $210,000, borrowing $200,000 and your closing costs were $4,000, currently the seller could pay up to $12,600 (6% of the homes price) toward your closing costs more than enough to cover the whole bill. If the sellers allowed concession, as its called, dropped to 3%, your seller could pitch in up to $6,300 still plenty.
Still the best mortgage for Florida homebuyers out there
Taken together, the upcoming changes will make buying a Florida home harder for individual consumers, no question about it. Approach the mortgage office with ID lanyards checked to refinance your existing mortgage loan before its too late. And the FHA administration says it intends to back out of its expanded role once FHA mortgage lenders start making more loans again.
But, FHA still has the lowest down payment in the industry, still has unbelievably low interest rates and still is doing fixed-rate 30-year amortization mortgages. Its still the best mortgage loan out there.