. Policy changes announced by HUD yesterday, Wednesday January 20, are expected to be implemented in the early summer and late spring of 2010. The changes will require borrowers to pay more for mortgage insurance, and borrowers with poor credit scores will have to come up with much bigger down payments. If you think you may be adversely affected by these changes, act now to become eligible for the best mortgage terms when buying or refinancing a home through FHA. FHA Home Loans Will Be More Expensive, Harder to Get
Federal Housing Administration (FHA) Commissioner David Stevens recently announced several policy changes to bolster the agency's financial position, enabling it to continue to support home ownership for borrowers with limited means and help facilitate the nation's real estate market recovery.
What Are the Key FHA Changes?
If you plan to buy or refinance a home through FHA, these are the changes that could affect you:
- Mortgage insurance premium (MIP) will be increased from 1.75% to 2.25%. On a $200,000 mortgage, that increases the upfront MIP from $3,500 to $4,500. This amount is usually wrapped into the loan, so it won't increase your out-of-pocket expense unless you choose to pay it at closing. Adding this higher amount to your loan will increase your mortgage payment, however. This change is expected to go into effect in the spring. Annual mortgage insurance premiums are not increasing at this time, but the FHA is seeking the authority to do so.
- Down payment requirements will be tied to FICO scores. You'll need to have a minimum FICO score of 580 if you want to make the FHA minimum down payment of 3.5%. Those with FICO scores of less than 580 will have to put up at least 10%. This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
- Seller concessions will be reduced from 6% to 3%. This limits the amount of help buyers can get from sellers, reducing the incentive to inflate appraisals--is a $212,000 home with 6% ($12,000) seller concessions really worth $212,000? Or $200,000? This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
What Can You Do?
A study by the Department of Housing and Urban Development found that borrowers who bring more money to the closing table are far less likely to default on their mortgages. These changes are FHA's way of keeping financing available while beefing up its reserves and minimizing risk. But if you're one of those who will be affected by the changes, what can you do? - Buy now. These changes don't go into effect until spring, so you have a couple of months to find a home and get under contract. The expiration date of the First Time Home Buyer Tax Credit should make a home purchase a priority anyway, if you qualify.
- Improve your credit. For those who can't manage a purchase immediately, it's probably easier and faster to improve a credit rating than to save an extra 6.5% for a down payment. The easiest and quickest way to improve a credit score is to make your payments on time--payment history makes up 35% of your credit score. By arranging electronic payroll deposits to your bank and automatic payments to your creditors, this can be relatively painless. What about collection accounts? If they're relatively new, go ahead and negotiate a payoff. But if the accounts are older, leave them alone. Your recent credit history is weighted much more than what you've done in the past, and by paying off an old collection, you actually bring it back into your recent history. If your accounts are maxed out, pay more than the minimum each month, and stop using the cards. Credit utilization is 30% of your score. By paying down balances on time, you'll improve both the history and utilization parts of your FICO score. Do this for about six months and see how much your score improves.
- Save money. You won't be able to get as much help from the seller to buy your mortgage interest rate down or pay your property taxes. That means bringing more cash in when you close on your home purchase. If you can save money while paying your bills on time and reducing your credit balances, do it. Again, automatic payroll deductions are probably the easiest way to manage this.
FHA's new requirements could be thought of as burdensome, but if complying with them forces you to adopt better debt management practices and save money, your new habits could make you better off for the rest of your life. Someday, you may even want to thank FHA.
Continuing three consecutive weeks of low mortgage rates, now is an excellent time to consider buying. If you are in the market for a new home loan, act now to find a lender and get free expert advice before these stricter standards are implemented!
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