FHA Changes

This article was posted by Allen Tate Mortgage, Charlotte, NC.

Most of you have probably heard about the upcoming changes being recommended by FHA. On January 21, HUD announced an increase in the upfront Mortgage Insurance Premium (MIP) from the current 1.75% to 2.25%. On a $100,000 loan, the upfront MIP will increase from $1,750 to $2,250. Using an interest rate of 5.0%, the monthly P&I would increase from $546.22 to $548.90, a difference of just $2.68.

Changes will be effective with case numbers issued by HUD on or after April 5, 2010. To help manage your clients’ expectations, please remember that case numbers are issued only upon receipt of a completed application by the lender. The cost to buyers is nominal, and more importantly, the MIP can be financed in the mortgage amount so it does not affect cash out of pocket. Because HUD is “self-funded,” these premiums provide income for HUD to maintain reserve requirements.

Also outlined as part of the new requirements are increasing audits for lenders that have large delinquencies with FHA. This will enable HUD to revoke a lender’s ability to originate loans if results indicate unacceptable credit decisions. Simply put, further scrutiny will be placed upon the underwriting process.

There are several proposed recommendations HUD is considering. These include 1) decreasing the amount of seller concessions from 6% to 3% and (2) possibly increasing the down payment amount to 5%. But until HUD issues a mortgagee letter (their method of communicating policy changes), these recommendations are simply suggestions. However, it’s important to inform your clients now of possible changes – and not risk the potential of them having to pay a larger down payment and lose seller concessions.

With FHA loans increasing from 3% of the mortgage market in 2006 to more than 40% of the market today, it is important this program remains strong. The recommendations and changes detailed above look to strengthen FHA overall, so it will remain a great option for borrowers in the future.