Colorado home buyers looking for FHA-backed loans will face tougher hurdles and higher costs under new legislation and new rules that could take effect within the next 60 days.
Higher monthly fees, larger down payments and better credit scores are among the new initiatives intended to insure that the FHA stays solvent. Its reserves, which are used to cover bad loans, have plummeted to $3.5 billion today from $19.3 billion in September 2008, according to a recent report from the Department of Housing and Urban Development.
Proponents of the measures applaud FHA's efforts to preclude the need for a taxpayer bailout, while also stepping up the quality of its insurance portfolio. But critics fear that the moves will stifle an already fragile housing market and will be most burdensome on first-time home buyers, who historically account for about 40% of all purchases. The FHA backs 30% of all loans outstanding and has accounted for nearly 45% of home purchases in Colorado during the past year.
Here's a rundown on some of the new initiatives:
Higher Monthly Mortgage Insurance Fees: Earlier this month, Congress gave the green light for FHA to raise the monthly premium it charges on loans. FHA-backed loans have looser restrictions than other mortgages on down payments - now at 3.5% of the home's selling price - but require borrowers to pay an upfront mortgage insurance premium (usually added on to the base loan amount) and a separate monthly mortgage insurance fee.
That monthly mortgage insurance fee is scheduled to go up from 0.55% to 0.90%, a 61% jump. On a $150,000 loan, this would represent an increase from $68 per month to $112 per month.
Lower Upfront Mortgage Insurance Premium: The good news is the upfront mortgage insurance premium, currently 2.25%, will be lowered to 1.00%.
Because the upfront mortgage insurance premium is usually added on to the base loan amount, FHA wants to get this number lower so as it decrease its exposure in the market. Raising the monthly premium has the effect of making it more difficult for buyers to qualify, which is also a safeguard against more defaults
Even with the decrease in the upfront fee, increasing the continuing fee is expected to generate $300 million per month, according to FHA.
Better Credit Scores: In its 76-year history, FHA has never required a credit score from borrowers, though the lenders typically have. That would change under a proposed rule that the FHA is expected to adopt.
FHA would require borrowers to have at least a 500 score for FHA backing. At 580 and above, borrowers would be eligible for the 3.5% down payment. But those who fall between 500 and 580 would see their down payments jump to 10%.
Many lenders are currently underwriting with "overlays" (higher internal standards) which require a 620 or 640 minimum score for FHA financing. Again, the name of the game across the board is "risk aversion."
Most conventional loans now require a minimum credit score of at least 660.
Reduced Seller Contributions. This is the change that will have the biggest impact on borrowers, because it will increase the cash required to close for many FHA buyers.
Historically, sellers have been able to contribute up to 6% of the price of the home toward an FHA buyer's purchase. While 3% is often sufficient for closing costs on median-priced homes, on lower priced homes (below $150,000) the closing costs often add up to much more than 3%. This is because many closing costs are "fixed" costs, such as underwriting, processing, title company closing fees, etc. This change means that on lower priced homes, FHA buyers will likely need to come up with more cash to close than ever before.
It is important to keep in mind that these changes will only affect new loans going forward. Current FHA borrowers will not see any change in their mortgage insurance or loan terms.
But by raising the bar on buyers, FHA is also making things harder on sellers, who need as many qualified buyers as possible to increase their odds of a successful sale in the post tax credit market.
