FHA changes – what you need to know.

Mortgages that are backed by the Federal Housing Authority (FHA) are now roughly 1/3 of all new loans originated in the last year and a half, according to a recent article in the Washington Post. To be clear, the agency does not make the loans, rather, it insures lenders against losses if the borrower defaults. The agency’s cash reserves are currently low because of increasing default rates. Here are a list of changes as well as future anticpated changes according to the Washington Post article:

1. Increasing the upfront insurance premium from 1.75% of the loan value to 2.25%. This will help the agency replenish funds from default issues.
2. Spot approval has been eliminated. This change is particularly tough on condo sales as now an entire project must be FHA approved as long as it meets certain guidelines (typically 50% owner occupied).
3. Cash out refinancing has been moved from 95% LTV to 85% LTV
4. In an effort to encourage investor purchasing, FHA has suspended their ban on FHA borrowers from selling their home if they owned it less than 90 days.
Changes coming soon:
1. Seller contibution to closing costs is dropping to 3% from 6%.
2. Increased scrutiny for high – risk borrowers.
3. Increased credit scores – Borrowers with credit scores less than 580 will need to increase their downpayment to 10%.
4. Short refinancing – this is a new program that would allow borrowers who are current on their mortgage payment to refinance into an FHA loan if they are underwater. this program may be a challenge as the existing lender will need to reduce the amount owed by at least 10% – plus other requirements.

Read the entire Washington Post article: http://www.washingtonpost.com/wp-srv/business/fha-loan-modifications/

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