Rumors have been swirling around now for months that the FHA was going to increase costs on their loans, these were confirmed at the end of last week by FHA commissioner David Stevens. They are the most sweeping and significant steps to improve FHA soundness in decades. The changes are supposed to insure the long term viability of the program and increase FHA’s capital reserves. They will require more skin in the game from borrowers too. The good news is that some of these changes will not go into effect until April and after, so this is another good reason why a buyer should act now. The FHA also lifted its 90 day waiting period for property resales.
 
What changes will be implemented?
• Increase the up-front mortgage insurance premium (MIP) to 2.25%;
• Update credit score and down payment requirements for new borrowers;
• Reduce seller concessions to three percent, from six percent; and
• FHA lifts 90-day waiting period for property resales.
 
So why did the FHA make these changes? Souring FHA-insured mortgages are threatening the agencies finances. HUD has been suffering major losses within their mortgage insurance pool. 
 

The FHA has also seen its share of the mortgage market go from 2% in 2006 to over 25% in 2009 and this is continuing to rise.  It is predominantly a first time buyer program and says it would be happy with a 10-15% market share, but because of the subprime bust and the ever increasing troubles at the ugly twins Fannie and Freddie, FHA has had to take on a major role in the housing recovery.  To cope with this growing demand for financing, they have had to increase their costs to make sure their reserves stay in check.

Here is an outline of the major changes announced by the FHA.

1. The FHA Upfront Mortgage Insurance Premium (UPMIP) has been increased from 1.75% to 2.25%. Remember the buyer does not have to bring this into closing, as this UPMIP is financed into the loan. HUD is also requesting that Congress increase the annual premium, which is the monthly mortgage insurance (this will probably happen sometime later this year). Currently it is .55% ($55 monthly per $100k) and .50% depending on your LTV position. This will allow for the capital reserves to increase with less impact on the consumer because the annual MIP is paid over the life of the loan instead of at the time of closing. This new 2.25% cost is effective for FHA loans for which the case number is assigned on or after April 5, 2010. 
 
2. Reduction in seller concessions from 6% to 3% seller. Here the FHA will reduce allowable seller concessions from six percent to three percent to conform to industry standards. This means the buyer won’t be able to get more than 3% from the seller to pay for their closing costs and pre-paids.  This will also reduce potential value inflation, as this has been a long standing discussion that appraisal values were raised to cover the additional expenses to the borrower, allowing the seller to pay for them. This change will not take place until early summer.
 
3. New loan-to-value and credit score requirements.Loans to borrowers with a FICO score of less than 580 will require a minimum 10 percent down payment. Loans to borrowers with a FICO score of 580 or above will require the traditional minimum down payment of 3.5 percent. I don’t see this as a big problem for now, because most lenders now require a minimum credit score of at least 620 anyway. This will also go into effect in the early summer.
 
4. FHA lifts 90-day waiting period for property resales (flipped properties). Starting Feb. 1, HUD will suspend for one year a 90-day waiting period on property resales that says has put FHA borrowers at a disadvantage in bidding on foreclosed properties. Research shows that acquiring, rehabilitating and reselling properties to prospective homeowners often takes less than 90 days. This temporary waiver will now give FHA borrowers access to a broader array of recently foreclosed properties. To protect FHA borrowers against predatory practices of “flipping” where properties are quickly resold at inflated process to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions.
 
• All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties in the transaction.
• In cases where the sales price is 20% or more above the sellers acquisition cost, the waiver will only apply if the lender meets specific conditions. i.e Lenders must have supporting documentation or a 2nd appraisal.
 
Another great reason to buy now!
I think these increased cost changes at the FHA were inevitable. But they are another reason for buyers to get off the fence immediately, as these extra costs do not go into effect until April. I have no doubt there will be more ongoing credit and underwriting changes too and probably higher costs to come in the future as the market tries to find a new normal. So, the next 90 days will probably represent the best time in many years to come for people to buy a home, while rates and costs are still low and the $8k tax credit is still available until April 30th.

In the meantime, if you have any questions in regards to the new FHA changes please do not hesitate to contact me directly at 858-200-9602

Best regards

Michael