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

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.

FHA mortgage insurance

Upfront insurance premiums for both purchase mortgages and refinancing mortgages remain the same in 2013 at 1.75 percent, but new annual mortgage insurance premiums (MIP) on FHA 203b loans vary according to the loan-to-value and the loan term. For loans longer than 15 years with a loan-to-value under 95 percent, the annual MIP is 1.30 percent; for loans above 95.01 percent, MIP goes up to 1.35 percent. FHA loans of 15 years or less require 0.45 percent in MIP.

Another change instituted as of April 1, 2013, is that mortgage insurance premiums, which used to be cancelled once the borrowers had paid for five years and their loan-to-value had reached 78 percent, will now continue for the entire loan term for borrowers who have a loan-to-value of 90 percent or less when they first take out the loan. MIP payments must be made for at least 11 years by other borrowers.

FHA refinancing

In spite of the mortgage insurance that is part of FHA mortgage requirements, FHA loans were 20 percent of all closed loans in February 2013, according to Ellie Mae, a provider of mortgage data. FHA loans had dipped to 18 percent of all mortgage loans in January 2013, so it’s possible that the uptick in these loans in February represents a flurry of activity prior to the increase in mortgage insurance premiums.

For purchasers, FHA loans remain appealing because borrowers can make a down payment as low as 3.5 percent and can use gift funds from family members or friends for the entire down payment.

For refinancing homeowners, FHA guidelines can make refinancing easier for borrowers who might be unable to qualify for a conventional loan. For example, FHA guidelines allow:

• Loan-to-value as high as 97.5 percent.
• Credit scores as low as 620.
• Debt-to-income ratio as high as 43 percent.

Keep in mind that individual lenders may have other guidelines for FHA and conventional loans, so borrowers should always consult a lender before making a decision on the type of loan that meets their needs.

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 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.

Every lender will need to meet FHA guidelines for a loan approval and will typically also be required to match the standards of their mortgage investors which may be higher than FHA standards. For example, while the FHA mandates that borrowers with a credit score of 580 or less must make a down payment of at least 10 percent, very few FHA lenders approve borrowers with a credit score under 620 or 640. Borrowers with a low credit score should search with several lenders to see if they can find one willing to approve an FHA loan.

FHA loan originations in 2012

According to Ellie Mae, the average borrower of an approved FHA loan in 2012 for a refinance had a credit score of 718, 88 percent loan-to-value, and a debt-to-income ratio of 39 percent. The average borrower of an approved FHA loan in 2012 for a home purchase had a credit score of 700, 96 percent loan-to-value, and a debt-to-income ratio of 41 percent.

Borrowers who were denied an FHA loan in 2012 for a refinance had an average credit score of 670, a loan-to-value of 88 percent, and a debt-to-income ratio of 44 percent. Those who were denied an FHA loan for purchase had an average credit score of 667, a loan-to-value of 95 percent, and a debt-to-income ratio of 47 percent.

FHA rates

Average FHA rates have been competitive with conventional mortgage rates in recent months and sometimes even lower. For example, according to HSH.com, for the week ending March 1, 2013, FHA mortgage rates averaged 3.39 percent while the average mortgage rate for a conventional loan was 3.80 percent. Borrowers can compare mortgage programs with a lender to find the best rates and the highest probability of a loan approval.

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.

New changes to FHA guidelines that go into effect April 1, 2013 and June 3, 2013 include:

• Higher mortgage insurance premiums.
• Mortgage insurance paid for the life of the loan if the initial loan-to-value is 90 percent or less.
• Borrowers with a credit score under 620 will be required to have a debt-to-income ratio lower than 43 percent.
• Loans of $625,000 to $729,000 will require a down payment of 5 percent.

FHA loan advantages

In spite of these higher costs, there are several reasons many borrowers may still prefer an FHA loan for a home purchase or refinancing:

• Lower down payment and equity requirements. FHA loans require a down payment of just 3.5 percent of home equity or 2.75 percent for homeowners, compared to minimum down payments of 5 percent and home equity of 5 or 10 or more percent by conventional lenders.
• Lower credit score requirements. FHA lenders often accept borrowers with a credit score as low as 620 or 640.
• Gift allowance for down payment funds. FHA guidelines allow the entire down payment to come from a gift rather than the buyers’ own funds.
• Qualification guidelines are looser. FHA lenders often allow a higher debt-to-income ratio or lower cash reserves than conventional lenders.

Consult with FHA-approved lenders to find the best FHA rates.

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.

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.

Michele Lerner

Lower down payments for buyers, lower home equity for refinancing homeowners and lower credit score requirements are the appealing parts of FHA loan guidelines for condo owners; but unless a condo development is also on the FHA approved list, an FHA-insured loan cannot be approved. FHA guidelines used to allow for a spot approval, which meant that individual borrowers could request an FHA loan even for a development that wasn’t on the list, but spot approvals are not permitted by current FHA guidelines. There is a review process that associations and lenders can pursue to see if the development can be added to the list, however.

On September 13, 2012, the FHA changed some of its rules to help more condo developments become eligible for FHA loans, but many of the existing FHA mortgage requirements remain intact.
Condo dues
One big issue many condo associations face is delinquent dues. As it stands, eligibility for FHA loans is denied if more than 15 percent of the condo’s owners are delinquent on their dues. But new FHA rules define delinquency as condo fees that are 60 days past due rather than 30 days past due, and this could make more developments eligible for the loans.

Even if a building is on the FHA approved condominium list, if more than 15 percent of homeowners are 60 days or more past due on their fees, a new FHA mortgage cannot be approved for anyone regardless of whether they are buying or refinancing.
Owner-occupants and investors
Another issue particularly relevant to new condo developments is how many units are owned by investors. In order to be approved by an FHA lender, at least 50 percent of the units must be owner-occupied. The rules have eased a bit on investors, with one or more investors now allowed to own up to 50 percent of the total units. In the past, a single investor could only own 10 percent of the homes. For new condominium communities, the units owned by the developer will no longer count as investor-owned properties.

Your lender can check any development to find out if it’s on the list of approved communities for FHA loans.
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.

When introduced in the 1930s, FHA guidelines were meant to provide mortgage financing for first-time, low-income and minority buyers. However, in 2011, the FHA Assessment Report shows that 54 percent of FHA loans were issued for properties with values greater than 125 percent of their area’s median value as compared to just 15 percent in 2007.

FHA loans for refinancing
While FHA requirements such as a down payment of just 3.5 percent clearly benefit home buyers, these loans can be equally appealing to homeowners who face refinancing challenges because they have credit problems or minimal equity in their homes.

Conventional financing typically requires a credit score of 720 or 740 or higher to get the best mortgage rates, while FHA lenders generally approve borrowers at the same interest rate as long as their credit score is higher than 620 or 640.

Borrowers who already have an FHA loan, may qualify for a streamline refinance with reduced documentation. Borrowers with a conventional loan can also benefit because FHA loans require as little as 3.5 percent in home equity.

The disadvantage of these loans is that all borrowers must pay mortgage insurance, which will increase their monthly payments. All borrowers should compare conventional and FHA loan options before choosing the appropriate mortgage.

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.

Regardless of whether the FHA loan is for a purchase or refinance, borrowers have two options for an FHA 203(k) loan:

• Streamlined 203(k). Streamlined loans are limited to a maximum of $35,000 in repairs, which must be non-structural, non-luxury projects such as replacing the HVAC system, replacing windows, appliances or kitchen counters. There is no minimum repair amount. All repairs must start within 30 days of settlement and be complete within six months.
• Standard 203(k). This FHA loan has a minimum repair amount of $5,000, allows structural repair work and requires a HUD consultant to supervise and approve of all renovations.

FHA mortgage requirements

Qualifying for an FHA 203(k) loan is similar to meeting traditional FHA mortgage requirements, including the need for a down payment (or home equity) of at least 3.5 percent, and the payment of mortgage insurance premiums. FHA lenders have varying standards for qualifications, but most require a credit score of at least 620 or 640 and a debt-to-income ratio of 41 percent to 45 percent, based on the total loan amount for renovations and purchase as well as other debts.

In addition, borrowers must pay slightly higher interest rates and additional fees that typically total about 1.5 percent of the cost of repairs. But given the limited availability of renovation loans and the higher credit and down-payment requirements for these transactions, an FHA 203(k) loan may be worth the extra costs for many homeowners and buyers who would like to renovate.

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.

FHA lenders

While the FHA Streamline Refinance program seems very simple, even FHA-approved lenders are allowed to set their own guidelines for loan approval. According to a recent article on BusinessWeek.com, some lenders such as JPMorgan Chase, Wells Fargo and Bank of America announced that they would limit their FHA Streamline Refinance program to current customers. The banks said they were overloaded with applications for an FHA refinance and could not handle additional new customers.

Housing industry experts told BusinessWeek.com that some lenders refuse to refinance customers, even on a Streamline Refinance, unless they had a high credit score. Some lenders are also requesting an appraisal before approving a loan, particularly in cases in which they suspect the homeowner

may owe a substantial amount on their mortgage above the value of their home.

Homeowners with an FHA home loan who want to refinance can contact their current mortgage servicer, but they also can shop around with other FHA lenders to compare programs as well as the individual requirements of each lender.

Refinancing from conventional to FHA loans

While a Streamline Refinance is clearly a better deal for homeowners because of the reduced mortgage insurance fees, some homeowners with conventional mortgage loans may also want to look into refinancing into an FHA loan. Borrowers with credit scores under 740 or 720 may want to compare their options for conventional and FHA refinancing, because while FHA loans require mortgage insurance, they do not have risk-based interest rates as conventional mortgages do. Borrowers with low equity may have a better chance of approval from an FHA loan, because the loan-to-value can be as high as 97 percent. An FHA-approved lender can calculate payments on both loans to see which one has the lowest monthly payments.

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.