Top 5 Challenges for FHA Mortgage Loans

FHA Home Loan Refinancing posted an intriguing article today that shed some light on the challenges that HUD is facing with their FHA loan program that is insured by the US government. Let’s face it the housing market and mortgage industry has been in shambles nationwide over the last three or four years.  Blaming FHA is not fair and certainly will not solve the problem.  FHA mortgage lending has taken risks, but they have adapted to the lending obstacles and made changes that should mitigate the risks without compromising the FHA loan benefits for American consumers.  First time homebuyers and existing homeowners both benefit from FHA home loans.  

5 Concerns Noted by the FHA Home Loan Refinancing Company

1.  FHA loan defaults have risen dramatically over the last 48 months.

2.  FHA mortgage reserves have dropped to dangerously low levels.

3.  FHA guidelines have tightened significantly and most FHA lenders require a 640 credit score to refinance.

4.  The FHA requirements for FHA streamline programs thus fewer borrowers qualify.

5.  The change in the appraisal policy for FHA refinance loans has slowed the process and increased the closing costs for borrowers.

Read the original FHA Refinance Loans article online.

Tighter FHA Requirements for FHA Lending

Expect to see increases in mortgage insurance for FHA mortgage loans typically have a low down payment requirement of only 3.5%, so borrowers must pay for mortgage insurance to offset that risk. Unlike private mortgage insurance, FHA borrowers are able to finance the mortgage insurance, thereby spreading its cost over the loan term.

The first change that will immediately impact borrowers is the FHA’s increase of the required up-front mortgage insurance premium to 2.25% of the base loan amount. This would add an additional $1,447 to a $300,000 mortgage. New Borrowers will see a minimum FICO credit score and 10 % down payment requirements. New borrowers will now be required to have a minimum FICO credit score of 580 to qualify for FHA’s 3.5% down payment program. Borrowers with a credit score below 580, while still able to qualify for a FHA loan, must now put down at least 10% of the purchase price–an amount that may be prohibitive for many borrowers with poor credit.

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The FHA is making an effort to lower its overall risk and improve the financial soundness of its insured loans, which in turn allows for the continued support of home buying in the United States. In doing so the FHA must find a way to keep their insurance fund’s capital ratio returns above the Congressionally mandated 2%, while continuing on their overall mission of aiding borrowers in underserved communities and facilitating the recovery of the housing market. These changes, along with the other FHA reforms will have varying effects on borrowers interested in a FHA home loan. For borrowers with low credit scores, some of these changes, such as the higher down payment percentage, will significantly affect their ability to buy a home. In the short term, the changes may motivate borrowers to lock into the old FHA guidelines before the new changes become effective.

FHA Mortgage Guidelines 10% Down for Low FICOs

FHA continues to alter their FHA mortgage guidelines in an effort to improve its depleted cash reserves.  A few days ago, the Federal Housing Administration unveiled tighter FHA guidelines with changes to the FHA requirements for underwriting new home loans and refinancing.  For the first time, FHA credit requirements will penalize applicants with challenged credit.  One of the FHA requirements changes will mandate larger down-payments for borrowers with bad credit or low FICO scores. In addition FHA will increase in the upfront mortgage insurance premium to 225 basis points.  We also anticipate FHA, to expand their criteria for mortgage refinance guidelines in 2010.

FHA commissioner David Stevens declined to provide any guidance on how much money the changes will raise for the reserve fund. Most of the new FHA guidelines outlined Wednesday will go into effect in the next few months. The 10% down-payment is required for borrowers with FICOs of less than 580. The MIP will be increased in a few months from the current charge of 1.75 basis points.

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