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FHA Guidelines: Avoiding Foreclosure and its Consequences

by Karen Lawson
February 11th, 2010

The federal tax credit for buying a home is slated to expire on June 30th, with a deadline of April 30th for signing a contract on purchasing a home. A Federal Reserve Program for keeping mortgage rates low will expire March 31st, and changes to FHA guidelines are expected to become effective in April. Although these programs have promoted home sales, it remains to be seen how they will affect U.S. housing markets. As far as FHA mortgages are concerned, I believe that implementing changes to reduce risk can only help the agency and housing markets.

FHA guidelines: Perception is reality

Bailout-weary taxpayers aren’t likely to favor any moves to bail out FHA reserves, which have fallen below legally mandated levels. The reserves in question are used for reimbursing mortgage lenders for losses associated with mortgage defaults and foreclosures. Although the FHA mortgage insurance program is self sustaining, a glut of foreclosures associated with the demise of the sub-prime market has strained the reserves to near rock-bottom.

Although FHA was caught unawares by a tremendous increase in its market share when subprime lending went south, it has made important strides in monitoring mortgage lenders and enforcing FHA guidelines for underwriting mortgage loans. Several high profile lender suspensions and increased auditing of FHA approved lenders are sending a message to mortgage lenders and the public that FHA is fiscally responsible and won’t bear unnecessary risks due to lax lending practices.

A common misconception about FHA loan programs is that they serve only financially challenged borrowers and borrowers with poor credit. The average FHA borrower has a FICO credit score in the mid 600′s, so the new requirement for a minimum credit score of 580 to qualify for the minimum down payment rate of 3.5 percent is not likely to impact large numbers of FHA mortgage loan applicants.

The second and third years of a mortgage loan term are said to be the riskiest in terms of mortgage loans going into default. The explosion of FHA mortgage loans made during 2007 and 2008 have entered and will enter that period during 2009-2010. With its reserves disappearing, FHA must move to reduce potential losses.

FHA mortgage loans support communities

HUD, the parent agency of FHA, is dedicated to rehabilitating communities and promoting home ownership in underserved communities. FHA loan programs make it possible for moderate income buyers to purchase and renovate blighted and foreclosed homes. FHA must strike a delicate balance between reducing risks and continuing to provide qualified buyers and homeowners the mortgage and refinance loans they need to keep and maintain their homes.

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