Late last year, HUD gave us all a warning that they were going to toughen up on FHA guidelines in January. I'm still waiting for the Mortgage Letter with all the nitty-gritty details to be issued which will be issued tomorrow, January 21, 2010. The changes to FHA are said to go into effect this Spring (wonder if it will be after the home buyer tax credit has expired).
FHA is going is going to increase the upfront mortgage insurance premium from 1.75% of the loan amount to 2.25%. I'm currently helping some home buyers relocate to Des Moines, Washington. They're buying a home with a sales price of $395,000 and the (currently available) minimum 3.5% down payment. Here's how this would impact their mortgage scenario based on:
- this morning's FHA rate for a 30 year fixed (as of 8:00 a.m.) at 4.875% (5.515% APR)
- base loan amount of $381,150
UFMIP (upfront mortgage insurance premium) rate of 1.75% = $6670 (base loan amount x 1.75%). 381,150 + 6670 (since it is being financed) = $387,820. Amortized for 30 years at 4.875% = principal and interest payment of $2,052.38.
UFMIP rate of 2.25% = $8575 (381,150 x 2.25%). Base loan amount plus 8575 = $389,725. Amortized for 30 years at 4.875% = principal and interest payment of $2062.46.
With this scenario, based on a purchase price of $395,000, the difference in payment is ten bucks.
FHA is increasing the minimum credit score to 580. Now before you get in a dither, please know that most lenders, including Mortgage Master, will not go lower than 620 for a mid-credit score with FHA because of bank underwriting "overlays".
FHA is also decreasing the allowable Seller Concessions from 6% to 3% of the sales price. This will have little impact on my transactions–typcially 3% of the sales price is more than enough since the contribution can only go towards actual closing costs, prepaids and reserves. Unless the seller was going to pay for the upfront mortgage insurance premium too…
It's my understanding that FHA is requesting to increase the annual mortgage insurance as well. They actually had risked based pricing of mortgage insurance approved back in the summer of 2008 which was then put under a moratorium which quietly expired October 2009. I'm sure they need to revamp the levels of risk since back in the summer of 2008, FHA was insuring loans with much lower mid-credit scores than what they (or lenders) would accept today.
So take a deep breath as the FHA belt continues to tighten and stay tuned to the Mortgage Porter…I'll keep you posted.