May 14th, 2013
The Obama administration estimates that the FHA could need an infusion of cash from taxpayers of nearly $1 billion, according to a report on April 10, 2013. The agency, which insures approximately $1.1 trillion in mortgage loans, faced a projected deficit of $16.3 billion in November 2012 according to an independent audit.
Since that audit, FHA mortgage requirements have changed in order to increase the size of the agency’s cash reserves. FHA Commissioner Carol Galante says that policy changes could bring in as much as $18 billion in 2013.
Some of the changes to FHA 203b loans in 2013 include increased mortgage insurance premiums and, in some cases, the requirement to continue paying mortgage insurance for the entire term of the loan.
FHA approved lenders have tightened some of their guidelines, too, so that home buyers and borrowers who want to refinance with an FHA loan now must have a credit score of 620 or 640 or above for most lenders, a debt-to-income ratio of no more than 43 percent and sometimes less, and documented income and assets.
However, the Obama administration estimates that risky FHA loans made as housing values dropped could result in losses of as much as $943 million.
How do FHA problems impact consumers?
Since the FHA was created during the Depression it has functioned as a source of funding available to all homebuyers and homeowners who qualify but primarily geared to borrowers with a modest income and to first-time buyers. However, FHA loan limits are higher in 2013 than loan limits for conventional financing in communities with high cost housing. For example, the conforming loan limit in Washington, D.C. for a conventional loan is $625,500, but the loan limit for an FHA loan in that area is $729,750.
Greater scrutiny of FHA borrowers and higher mortgage insurance premiums are two consequences that have already impacted FHA borrowers, but critics of the government agency believe loan requirements should be tighter to avoid future loan defaults.
Whether this bailout actually occurs and the consequences for future FHA guidelines remains to be seen.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.