FHA Guidelines: How Will Policy Changes Affect Housing Markets?

by Karen Lawson
March 30th, 2010

With the end of the federal tax credit program for homebuyers looming, the Mortgage Bankers Association  President and CEO John Courson recently addressed the Congressional Housing and Finance Committee’s sub mmittee on Housing and Community Opportunity to address changes in FHA guidelines. Referring to a proposed reduction in seller contribution limits from 6% to 3%,  Mr. Courson noted: “…reduction in seller concessions will primarily impact low to moderate, first time, and minority homebuyers.” Although allowable seller concessions currently remain at 6%, FHA is expected to reduce them prior to summer’s prime homebuying season.

FHA Up-Front Mortgage Insurance Premium  (UFMIP) Increasing April 5

FHA is increasing the UFMIP rate from 1.75% of base loan amount to 2.25% effective with FHA case numbers issued April 5 and beyond. While most FHA borrowers roll the UFMIP into their loan amount, the increase would cost borrowers of a $200,000 mortgage loan an additional $1000. FHA loans are attractive to moderate income buyers and homeowners who don’t have 10 to 20% down or sufficient home equity  to qualify for conventional mortgage loans or refinancing.

FHA Policies: Larger Market Share Creates Stronger Impact

FHA lending programs provide the majority of home loans for moderate income buyers and those facing credit challenges; when the sub prime lending industry collapsed, FHA home loan programs became the only accessible option for many home loan borrowers. Currently FHA’s market share of US mortgage loans is approximately 30%. Mortgage lending and real estate industry analysts are concerned that sweeping changes to FHA guidelines complicate the comeback of struggling housing markets as would be borrowers struggle to come up with extra cash for closing their FHA loans.

FHA Loan Programs Strive to Remain Self-Sustaining

As its cash reserves fell below mandated levels and talk of yet another federal bailout began, FHA moved to reduce risks associated with its home loan programs. The agency’s rapidly increasing market share is blamed for slack monitoring of approved mortgage lenders, some of which played fast and loose with FHA lending requirements. As foreclosures increased, FHA administrators adopted the new guidelines to help cut losses and keep the FHA loan programs self-sustaining. Although legislators called for an increase in the minimum FHA down payment from 3.5% to 5%, FHA has not increased its minimum down payment requirements for borrowers with credit scores of 580 or more. Borrowers with credit scores below 580 will be required to make minimum down payments of 10%.

While there is no easy or perfect solution to FHA’s financial challenges, it’s essential to keep FHA lending programs viable and accessible to those depending on FHA loans for buying and refinancing homes. While FHA is reducing seller concessions to buyers, it’s important to keep in mind that FHA allows homebuyers to include cash received  from family, friends, and local housing agencies toward down payments and closing costs.

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