FHA Rulebook Changes 2010

Mortgage Market Update

From the desk of Joe Bailey

Keeping You Informed…

FHA Rulebook Changes: Higher Fees, Bigger Down Payments, And More Mortgage Insurance

Life as an FHA borrower just got tougher.

In an effort to shore up its flailing balance sheet and dwindling capital reserves, the Federal Housing Authority rolled out sweeping financial changes on Wednesday.  FHA borrowers must now look better on paper and have more cash at closing.

Mortgage insurance premiums are rising, too.

In its official announcement, the FHA said it’s trying to “better position the FHA to manage its risk while continuing to support the nation’s housing market”.

The changes are effective with case numbers assigned starting April 5, 2010.

One widely speculated change wasn’t made — the increase of the FHA minimum down payment.  Homebuyers in California and elsewhere can still buy with just 3.5 percent down.  However, the FHA did roll out a number of other changes, including:

• An increase in Upfront MIP from 1.75 percent to 2.25 percent
• A reduction in maximum seller contributions from 6 percent to 3 percent
• A Congressional request to increase monthly mortgage insurance premiums

Furthermore, the FHA’s new guidelines institute a minimum FICO requirement of 580 to make the minimum 3.5% down payment, requiring 10 percent for any applicant whose credit score falls below that level.

But, just because the FHA allows a 580 FICO, it doesn’t mean that banks will approve it.

The official term here is “investor overlay”. It’s when the banks use FHA guidelines as a starting point for their own set of underwriting rules which are often more strict; banks have a good reason for making investor overlays.

Last week, the FHA subpoenaed 15 lenders — including the well-respected 1st Advantage Mortgage in Lombard, Illinois — because of abnormally-high FHA default rates.  The act was a shot across the bow, it seems, because in Wednesday’s FHA statement, the group established an official benchmark for FHA loan performance.

If a bank’s defaults exceed the mean by a certain number of sigmas, the FHA terminates the bank. Period.

For this reason, FHA investor overlays will be a running theme of 2010.

The FHA changes go into effect this spring.

“Play like a champion today!”

 
Joe Bailey – Loan Officer
O.  (831) 689-8500
C.  (831) 251-5167

JBailey@JoeBailey.biz

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