FHA LOANS? They’re Likely To Cost You More!
FHA LOANS? They’re Likely To Cost You More!
MINIMUM FICO CREDIT SCORE LIKELY TO ALSO INCREASE AS WILL MORTGAGE INSURANCE COSTS. MAXIMUM SELLER CONTRIBUTION COULD FALL!
FHA-Backed Loans!
Until about two years ago this source of mortgage funding for those with imperfect credit and low down payments was often ignored in favor or readily-available Low Down Payment Conventional Loans or Piggyback Mortgages involving an immediate second mortgage taken at closing. Indeed as recently as 2006 the Market Share for FHA Loans was only 3%! Today nearly 30% of all new purchase loans and 20% of loan re-finances are FHA-backed. (Figures reported in Mortgage News Daily online by reporter Jann Swanson).
Since many of the exotic high-leverage mortgage loans ended in default during the still-continuing credit crunch banks have stopped offering them. FHA loans for many became the only option for home financing.
The FHA Loan’s new found popularity however has actually created a bit of a crisis for the agency as its federally-mandated Secondary Reserve Level of 2% has actually fallen far short – to 0.53% of its total backing insurance in force. Although the FHA is likely to withstand the current shortfall according to the Department of Housing and Urban Development Secretary Shaun Donavan a number of tightening measures are likely to be enacted in 2010 to improve overall reserves and limit exposure from defaulting loans.
One change involves increasing the minimum FICO Credit Score necessary to obtain FHA Financing. Once such loans only required a minimum FICO Score of around 560 on a non-linear scale to over 800. Today the FHA Minimum is 620 – and it may go higher still. The actual new FICO Minimum is yet to be determined.
Currently the Minimum Down Payment on an FHA Loan is 3.5%. The agency is discussing increasing this minimum down requirement. The exact level of such increase not yet finalized.
Up-front Mortgage Insurance Premium (MIP) currently stands at 1.75% of the total loan amount. That insurance premium meant to cover the lender’s risk should the loan default could increase as high as the current Federal Cap – 3.0%. Annual mortgage premium amounts currently set at 0.55% of the loan amount until the amount of equity versus the original loan amount hits 20% might go up as well. These monthly amounts are calculated by multiplying the original loan amount by the 0.55% figure and dividing by 12 to arrive at a monthly MIP premium amount.
Currently those financing with an FHA Loan can receive a seller credit of up to 6% toward their closing costs and pre-paid items (but not the 3.5% down payment itself). Likely this Maximum Seller Contribution will decrease to 3% – a figure more in line with the maximum seller contribution for other types of mortgage loans. Late last year the FHA put an end to the practice of seller credits against the buyers Down Payment itself – many of the loans involving such a seller-paid down payment credit quickly went into default.
Secretary Donovan emphasizes these proposed changes are not designed to be permanent. Instead it is meant he said to Reporter Swanson as a "bridge to economic recovery" until more private mortgage money returns to the system.
Will tightening requirements and increasing costs for obtaining an FHA-Backed Loan dampen housing market renewal? Hopefully such impact will be muted.
DEAN MOSS & DEAN’S TEAM CHICAGO
