FHA loans have become a very popular vehicle for home buyers to enter the market. They offer the possibility of making a down payment as low as 3.5% of the purchase price. FHA loans also come with relatively liberal rules for your credit level, getting financial assistance from family members, and enabling sellers to help you buy, by contributing toward your closing costs.
Recently some new rules have been announced concerning FHA loans. The Department of Housing and Urban Development, the federal agency which overseeing the Federal Housing Administration, has revised some features of the FHA program that they perceive to be too risky in the current real estate environment. Here is a quick overview of the coming changes.
Higher FHA Mortgage Insurance Premiums
FHA borrowers pay an up-front and an ongoing monthly insurance premium to the Federal Housing Administration in order to support FHA's insurance program. The insurance benefits lenders in the event that lenders face losses from defaults on FHA loans that they have made.
At present the up front premium is 1.75% of the loan amount. This premium will increase to 2.25% on April 5, 2010. The increased insurance premiums are expected to help the FHA build up its capital reserves during a time of increased defaults.
Higher Credit Score Requirements
If the borrower is putting down only 3.5%, which is the current FHA minimum down payment percentage, the borrower will be required to have a credit score of at least 580. That's a fairly low score. Many private lenders who make FHA loans actually set a higher limit. Nevertheless, under the new rules, if the borrower has a score less than 580, a down payment of at least 10% of the purchase price will be required, rather than 3.5%.
Restrictions on Seller Contributions Toward Closing Costs
FHA borrowers presently are allowed to accept seller contributions toward buyer closing costs in the amount of 6% of the purchase price. This limit will be reduced to 3% in order to reduce incentives for sellers to artificially inflate the values of their homes.
All of these changes, which take effect for FHA loans with case numbers assigned April 5 or later, will tighten the FHA program, helping to ensure its availability in the future.
Anti-Flipping Rule Eased
Meanwhile, another change has been announced by HUD which actually liberalizes the program for homes that are sold and then quickly resold. Until very recently, homes that came on the market within 90 days of having been sold were ineligible for FHA financing. That rule existed to protect the FHA program against "flipping," in which the seller, out to make a quick profit, bought low and sold high.
HUD reconsidered its rule when it realized that many properties in today's market were being offered legitimate investors who rehabilitate foreclosed homes that they have purchased, renovated, them offered on the open market within a 90 day period. The rule change permits FHA financing in this situation whereas previously such properties were not eligible until 90 days had elapsed. The 90 day rule existed to prevent fraudulent transactions in which sellers benefited from rapid and inflated resale values in a bubble market. FHA no longer considers that risk to be significant and instead intends to stimulate the market by allowing FHA financing where previously it had not.
