How FHA Changes Will Affect Housing
"The Federal Housing Administration (FHA) is planning two major changes that will impact home buyers and the housing market," said Gibran Nicholas, chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. "These changes will reverberate throughout the entire housing market because the FHA insures approximately 30% of all home loans in the U.S. today."
Buyer's Down Payment Effectively Doubled
"The required buyer contribution when buying a home will be nearly doubled to 6.5% from the current 3.5%," Nicholas said. "When a home buyer uses an FHA-insured mortgage to purchase a home, the seller is currently allowed to contribute up to 6% of the sales price toward the buyer's closing costs. This is due to the fact that FHA loans carry much higher closing costs than conventional mortgages. For example, the FHA charges an additional 2.25% in upfront mortgage insurance that isn't associated with traditional loans. Under the proposed changes, sellers would only be allowed to contribute 3% of the sales price toward the buyer's closing costs. This means that home buyers will not only need to come up with the traditional 3.5% down payment, but they will also need an additional 3% for closing costs that have traditionally been paid by sellers."
Higher Credit Score Requirements
The FHA has traditionally not imposed minimum credit score requirements on mortgage borrowers, leaving it up to lenders to evaluate the borrower's credit. However, the FHA is now proposing to enforce a 500 minimum credit score across the board. Furthermore, any score between 500-579 will require a 10% minimum down payment instead of the current 3.5% minimum down payment.
The Department of Housing and Urban Development (HUD), which sets the guidelines for FHA loans, is giving interested persons until August 16, 2010 to comment on the proposed changes. "After that time, HUD will take all the comments into consideration and publish final rules that will likely be effective later this year or sometime in 2011," Nicholas said. "We told HUD that we completely disagree with their proposal to effectively double the buyer's down payment requirements by reducing seller-paid closing costs. This will hurt the housing market by making it more difficult for qualified buyers with high credit scores to buy a home. On the other hand, we applaud HUD's second proposal for higher credit score requirements because this may actually be better for the housing market in the long run. It preserves the FHA insurance fund and greatly reduces future foreclosures associated with riskier lending. In any case, home buyers considering an FHA loan should get moving today in order to avoid getting blindsided by these new rules."
For more information, visit www.cmpsinstitute.org.