There’s a lot of flurry over recent FHA regulations and changes. I broke it down into the stuff that really affects you. That said, at any point you can go check out the original release by the FHA (Read it Here), but it’s probably better if you just read through this first.
These are the questions that everybody is asking:
Is it true I have to give a 10% down payment if I want to use FHA?
Yes, but only if you have a credit score below 580. THIS IS A FLAW because lenders made the minimum lending credit score 620 an industry standard a year ago. Despite FHA changes odds are if you have a credit score below 620 it won’t matter what your down payment is, you’ll have to purchase all cash or the most practical option would be to improve your credit score (See my post “Bad Credit…Is It Really that Bad?“).
What’s the deal with mortgage insurance? I don’t understand the math here!
Mortgage insurance is basically an insurance policy that you pay for to protect the bank in case you stop making your payments or “default” on your loan. The current upfront mortgage insurance premium (MIP) is 1.75% of your loan total and is usually financed into your loan. This is an FHA change you should pay close attention to, especially if you’re looking to purchase soon.
That’s the upfront MIP, there’s also a monthly MIP of 0.5% of the loan amount. The new guidelines would increase the total MIP by another 0.5%. How they are going to divide it between the upfront and the monthly still remains unknown, hopefully the upfront will go from1.75% to 2% and the monthly will go from 0.5% to 0.75% so that it’s evenly distributed.
You can’t escape mortgage insurance during the first 5 years of a loan that has a term longer than 15 years, or unless you owe 80% or less on your loan. Until then, you have to pay it!
What are seller concessions and why are they being reduced from 6% to 3%?
Seller concessions are the percentage of the purchase price that a seller will concede, or pay, to help with closing costs and/or interest rate buy down. Prior to these new changes, a seller could contribute up to 6% of the purchase price, now it is set to 3%. The FHA reasoning behind this, if I am interpreting this correctly, is to limit inflated appraisals.
This too, does not make sense because this seller concession percentage was a standard set in place by Fannie Mae and Freddie Mac prior to the new FHA change in regulations.
When does the new FHA regulation take effect?
The FHA has not really given a set date, they did however give a good “guess-timate” as to when they will implement these policies. These is what the release says:
- FICO Score & Down Payment Policy- Early Summer
- Mortgage Insurance Premium Increase- Spring
- Tougher FHA Lender Regulation- Early Summer
How is FHA fighting fraudulent lending practices?
Well for starters, they’re trying to increase transparency to the public by lenders. The FHA plans to do this by making performance rankings for lenders available to the public. They plan to particularly focus on “rogue-performers” which they believe deviate from ethical practices set by the FHA rules.
Bottom Line
Thus far every attempt by the government to fix the housing market has done nothing more than delay a natural market adjustment. There are all kinds of regulations that were set in place to “protect consumers” however all they did was add to their woes. An example of this would be recent HVCC changes which prohibit appraisers from talking to agents or Lenders (we all know why, but still it makes everyone’s job harder).
I do believe that FHA wants to protect home buyers and tax money. It is my impression that the FHA has good intentions, but you know what they say the road to hell is paved with…
I just delivered the update, it’s up to you what you make of it.
Related articles:
- FHA Makes Move to Reduce Exposure to Risk: In English – It’s going to cost you more to get an FHA loan! (CalPETR.com)
- BREAKING NEWS: FHA Lifts No Flipping Ban – Translation: More FSBO’s Available on the Market(CalPETR.com))
- New Good Faith Estimate – Definitely a Step in the Right Direction(CalPETR.com)
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