October 4, 2010 in Mortgages

FHA changes home mortgage rules

Federal Housing Administration home loans are getting a tuneup, with many changes going into effect Oct. 4.

Under new rules, potential borrowers will likely save thousands at closing. But those monthly mortgage payments will be a little higher.

In addition, FHA is setting a minimum FICO score of 500 for homebuyers. And borrowers with scores of less than 580 will have to put 10 percent down, instead of 3.5 percent.

If you’re looking to buy or sell a home in the near future, FHA’s changes are likely to impact your wallet. The agency purchases 30 percent of the residential market, up from 3 percent in 2007, according to the U.S. Department of Housing and Urban Development.

Recently, FHA opened its refinancing program to a larger section of homeowners who owe more than their homes are worth. The agency is also considering limiting seller cash contributions on mortgages to 3 percent of the home price, down from the current 6 percent.

Want to know what each of these changes could mean to your bottom line? Following is the breakdown:

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Old rules: Borrowers were required to make a 3.5 percent down payment, plus a 2.25 percent one-time, upfront insurance premium paid at closing. On a typical $177,000 house (roughly the U.S. median, according to the National Association of Realtors), that equaled $10,178.

New rules: The down payment stays the same, but the one-time fee decreases to 1 percent. So for the same home, you pay $7,965.

These rules take effect with all lender applications made after Oct. 3, says Vicki Bott, HUD deputy assistant secretary for single-family housing.

While the FHA could raise that rate on future borrowers, “in the near future, that’s not likely to happen,” says Gibran Nicholas, chairman of the Ann Arbor, Mich.-based CMPS Institute, which certifies mortgage professionals.

What you need to know: “Consumers who are using FHA insurance can take advantage of these lower upfront costs to build up their cash reserves in case of unexpected repairs that may be necessary,” says Barry Zigas, director of housing policy for the Consumer Federation of America in Washington, D.C.

Owning a home is expensive, so the smart move is “to save the upfront money these changes generate, rather than spending it,” he says.

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This part of your mortgage insurance premium is calculated annually, broken into 12 parts, and paid monthly with your mortgage.

Old rules: The rate was 0.55 percent of the loan balance annually. For a $177,000 home with 3.5 percent down and a $170,805 mortgage, that amounted to $78 per month for the first year. (The fee, which is based on the loan balance, decreases annually.)

New rules: The rate goes to 0.9 percent. With that $170,805 mortgage, it will cost $128 per month the first year.

While it’s not anticipated in the near future, the FHA has authority to raise the fee on future borrowers to as high as 1.55 percent, Bott says.

What you need to know: The rules go into effect Oct. 4. Changes to the upfront and annual fees make it a little easier for borrowers to close, but add a little to the monthly mortgage. But with lower mortgage rates, the move to 0.9 is “really kind of a wash,” Nicholas says.

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The FHA is setting a minimum credit score for borrowers.

Old rules: There was no minimum score from FHA; lenders set their own standards and were allowed to set score minimums.

New rules: For a regular FHA home loan, you need a FICO score of at least 500. Borrowers with scores from 500 to 579 are required to put 10 percent down, instead of the usual 3.5 percent. On a $177,000 home, that means coming up with $19,470 (down payment plus upfront premium) at closing.

What you need to know: Steve O’Connor, senior vice president for public policy and industry relations for the Mortgage Bankers Association in Washington, D.C., says lenders are likely to “impose higher standards,” and that “as a practical matter, the true threshold will be higher than 500.”

These rules go into effect with lender applications submitted after Oct. 3.

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FHA refinancing loans are now available to greater numbers of homeowners who owe more than their homes are worth.

Old rules: Some underwater borrowers were able to qualify for FHA refinancing loans.

New rules: The pool of such borrowers has been expanded with more concrete underwriting requirements and nonmonetary incentives to lenders who participate.

Homeowners may be eligible if all of the following apply:

  • Are trading a non-FHA mortgage for an FHA mortgage.
  • Have a credit score above 499.
  • Are current on the mortgage.
  • Can get the lender or investor to write off at least 10 percent of the old loan.
  • Are financing no more than 97.75 percent of the home’s value.

What you need to know: This temporary program is now in effect. The new rules expire in December 2012. So if you’re considering FHA refinancing, you want to act before then.

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The FHA is considering a move to limit seller concessions.

Old rules: Sellers could kick in up to 6 percent of the home’s selling price in cash.

Proposed rules: Sellers would be limited to 3 percent in cash concessions. Anything more would have to come in the form of a price reduction on the house.

What you need to know: This “could potentially” make FHA loans more popular with sellers, Nicholas says.

This proposal is under consideration and appears likely, Bott says. Expect a decision by the end of 2010.

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The FHA is considering concrete rules for manual underwriting.

Lenders often use an automated format to evaluate FHA borrowers. But some borrowers who appear risky can make good mortgage candidates when other factors are considered, Bott says.

Old rules: Right now, only general guidelines are in place, Bott says.

Proposed rules: The proposed changes offer specifics. With a FICO score below 620, the mortgage payment could not exceed 31 percent of the gross income; total debt load (including mortgage) couldn’t top 43 percent.

Some mitigating factors could help borrowers who don’t meet those guidelines:

  • Significant additional income not included in gross income.
  • Savings equal to three mortgage payments.
  • Successful history with similarly sized mortgage or rent payment.

With a 620 score and one mitigating factor, the mortgage could total 35 percent of the gross income; total debt load could go to 45 percent.

With a 620 score and two mitigating factors, the mortgage payment could equal 37 percent of the gross income; total debt load could go to 47 percent.

What you need to know: Explicit manual underwriting standards should encourage lenders to consider potentially solid candidates, Bott says. A decision is likely by year’s end.

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