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WASHINGTON, D.C. – Mar. 2, 2010 – (FreeRateUpdate.com) – It’s about to get tougher to qualify for an FHA mortgage — a government insured, low-down payment home loan often considered the replacement loan for subprime mortgages.
Moving to head off the financial impact of defaulting borrowers, the FHA is adding more-stringent lending requirements and higher fees borrowers must pay to get the federally-insured loans.
Rising foreclosures have gutted the FHA’s reserves, leaving them $45 billion in reserves to cover $757 billion in home-loan guarantees. The cushion is far below the amount mandated by Congress.
RealtyTrac says January’s foreclosures were up 15 percent from a year ago and it could get worse.
“If history repeats itself, we will see a surge in the numbers over the next few months as lenders foreclose on delinquent loans where neither the existing loan modification programs or the new short sale and deed-in-lieu of foreclosure alternatives works,” said James J. Saccacio, chief executive officer of RealtyTrac.”
Because FHA loans are low-down payment loans they come with a requirement that the borrower buy mortgage insurance. That’s because mortgages made for home purchases with smaller down payments have a higher risk for default and foreclosure. When a borrower goes into foreclosure, the action triggers
mortgage insurance benefits that pay the lender to cover the loss.
Before the housing market’s boom-bust cycle, FHA loans accounted for a fraction of all mortgages. Today they account for 30 to 50 percent of all purchase loans in some locations. More loans exposed to risk have drained FHA coffers and forced the federal agency to cut it’s losses.
The latest FHA announcement comes on the heels of an FHA investigation into 15 FHA lenders with high foreclosure rates.
In another risk-reduction move late last year, the FHA proposed stiffer rules for lenders — a requirement to have a net worth of at least $1 million in the first year and $2.5 million within three years, up from the original requirement of
$250,000.
New FHA loan guidelines / FHA loan changes / FHA Loan Requirements
Bringing risk reduction efforts to the consumer level, effective April 5, the FHA will raise mortgage insurance fees that borrowers must pay, cap the amount of cash that sellers can contribute for closing costs and require higher down payments for the borrowers with poor credit scores.
- The new upfront mortgage premium will cost borrowers 2.25 percent of the loan amount, up from the current 1.75 percent — the second increase in the past two years. The upfront premium can be rolled into the loan. Later, some of the cost increase could be added to a borrower’s additional annual mortgage insurance premium (about 0.55 percent of the total loan amount) which is paid monthly.
- New borrowers must have a minimum FICO credit score of 580 to qualify for FHA’s 3.5 percent down payment loan, otherwise the borrower must put 10 percent down. Most lenders require a minimum credit score of about 620. A credit score is a numerical rendition of a borrowers creditworthiness. The higher the score, the better the credit and the better likelihood of qualifying for the least expensive loan.
- Sellers will only be able to contribute closing costs that amount to 3 percent of the sale price, half the current 6 percent. Experts say the higher maximum encouraged borrowers to mark up the price to compensate for their concession.
FHA loan basics / FHA loan requirements
FHA’s low down payment loans are available for 15- and 30-year terms with fixed or adjustable rates, for those who qualify.
The loans are absent repayment penalties and other “gotchas” that plagued subprime mortgages and other easy-money loans available during boom times.
Typically, no more than 31 percent of your gross monthly income can be used for housing costs including mortgage principal, mortgage interest, property taxes and property insurance (PITI). As much as 43 percent of your income can be used for PITI plus recurring bills. The numbers are sometimes
expressed as 31/43.
Higher ratios of 31/55 and 33/45 are available for specialty FHA loans.
For 2010 loan limits for a single-family home range from $271,050 to $729,750, the higher limit for high cost areas.
The required mortgage insurance, can’t be canceled during the first five years, but is automatically canceled after 15 years or if the loan-to-value ratio of the mortgage falls to 78 percent of the original debt.