How New FHA Changes Could Affect Home Buyers

Earlier this week, the Federal Housing Administration (FHA) implemented changes to the premium structures for an FHA-backed mortgage.

My membership in the Top 5 in Real Estate Network® requires that I remain committed to keeping my clients and consumers informed, so it's important that I let you know that these changes may make it more costly for home buyers to procure FHA loan products.

In the wake of the real estate decline and credit freeze of the past three years, FHA-insured loans soared as borrowers sought alternative avenues for securing affordable mortgages. The FHA loan is popular because its minimum down payment is 3.5%, whereas most conventional loans require a much higher down payment. Recently, however, housing experts have raised concerns about FHA's shrinking funds and its ability to handle increasing defaults, sparking the agency’s impending regulation changes.

According to CNNMoney.com, FHA reported that its reserve fund has dropped to 0.53% of its insurance guarantees, well below the 2% ratio mandated by Congress and the 3% ratio it had last fall. This fund covers losses on the mortgages the agency insures. FHA borrowers pay for the insurance that backs their loans in the form of an upfront premium and an annual premium.

The agency has seen a spike in delinquencies amid the mortgage meltdown. Some 14.36% of FHA loans were past due in the third quarter, according to the Mortgage Bankers Association. To compensate for its rapidly depleting reserve fund, the following changes will be implemented to FHA lending:

Upfront mortgage insurance premiums will decrease from 2.25% to 1.00%.
At the same time, the 0.55% annual premium will be increased to 0.85% for mortgages with loan-to-value ratios up to and including 95%, and to 0.90% for loan-to-value ratios above 95%.
Borrowers will be required to have a credit score of at least 580 to qualify.

These changes in FHA lending may be paving the way for conventional financing with private mortgage insurance (MI) to make a comeback in lending for low down payment buyers. According to loan experts, both MI and FHA have their place, but borrowers should consult with their real estate professional and lender to determine what loan options are best for their particular situation.