Why FHA loans may become less popular

by admin
January 12th, 2013

While no official date has been given for the changes, Acting FHA Commissioner Carol Galante promises several policy changes would be put in place before January 31, 2013, according to Inman News. The changes will impact new FHA loans and place a moratorium on the Standard Fixed Rate Home Equity Conversion Mortgage reverse mortgage program. Borrowers who currently have an FHA 203b loan will not be impacted by the changes, but borrowers who are refinancing an FHA loan may be impacted by the new FHA mortgage requirements.

The anticipated changes will be felt primarily by would-be FHA borrowers with a low credit score, loan applicants who have experienced a foreclosure, and borrowers at the high end of FHA loan limits.

Specific proposals set to change FHA requirements:

  • Credit score, debt-to-income ratio, and compensating factors
    Borrowers with a credit score below 620 will be required to have a debt-to-income ratio of no more than 43 percent for automatic underwriting. Borrowers with a higher debt-to-income ratio will require manual processing and FHA lenders will need to document compensating factors such as a bigger down payment or more cash reserves. However, very few FHA lenders even accept applications from borrowers with a credit score below 620 and many require a credit score of 640 or higher.
  • Down payments and mortgage insurance premiums
    Loans between $625,500 and $729,000 will require a down payment of 5 percent rather than the standard 3.5 percent for FHA loans. In addition, mortgage insurance premiums for these larger loans will rise to 155 basis points (1.55 percent).
  • Underwriting criteria after foreclosure
    FHA loan applicants who have owned property that was foreclosed on will need to meet all underwriting criteria and have reestablished their credit. Some FHA lenders have promised that borrowers can automatically qualify for an FHA loan as long as three years have passed since the foreclosure. In addition, the FHA will ask lenders to review loan performance to see if borrowers who lost their homes due to a one-time event such as a job loss are more likely to keep up with payments on a new home loan than borrowers who lost their home for other reasons.

While this may not be happy news to borrowers, higher down payments, higher mortgage insurance payments, and stricter credit guidelines are likely to be part of the solution to fix the FHA mortgage program.

Michele Lerner

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 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.

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