Things are about to get harder for first-time home buyers who have their sights set on an FHA (Federal Housing Authority) home mortgage. Borrowers will soon be required to have "more skin in the game", according to Housing and Urban Development Secretary Shaun Donovan. Donovan is scheduled to announce the following FHA policy changes when he testifies next Wednesday before the House Financial Services Committee:

  1. increase up-front cash paid by FHA borrowers from the current 3.5% (one lawmaker is proposing 5%)
  2. raise the minimum credit scores for borrowers who receive FHA-backed mortgages to protect the FHA from the riskiest borrowers (the current minimum credit score requirement is a mere 500 out of 850)
  3. limit the amount of money sellers can kick in from the current 6% of the home's value (3% is proposed)
  4. limit the amount of money sellers can contribute toward buyers' closing costs
  5. limit the value of free upgrades (e.g. new construction)
  6. increase monthly insurance premiums charged to borrowers and paid up-front (currently set at 1.75% of the value of the loan)
In addition, it's expected that banks will be required to have up to $2.5 million in capital they can use to repay the agency for losses if it's discovered that they're involved in fraud (up from the current $250,000) and it's also expected that the agency will be granted more authority to close down abusive lenders. Tto-date the FHA has suspended business or withdrawn FHA approval from 277 lenders.

These measures are designed as part of an effort to shore up the FHA's finances, whose exploding volume of loans is backed by cash reserves that have eroded below the level required by law. Excess cash the agency must set aside to deal with unexpected losseswere at about $3.6 billion as of Sept. 30, a signficant drop from the $12.9billion available a year earlier. The current total represents 0.53% ofall outstanding single-family-home loans insured by the FHA, well belowthe 2% threshold set by law. This is the first time reserves havefallen below that level since 1994.

The FHA has played an important role in supporting the housing market by insuring lenders against defaults since the onset of the mortgage meltdown. The agency currently backs about 30% of all home loans and 20% of loans that are refinanced. While in the past the FHA has been reluctant to raise downpayments or insurance premiums for fear of alienating qualified borrowers and further stymying the housing recovery, measures must be put in place to begin curbing rising defaults in theFHA's mortgage insurance program before the situation potentially becomes so direthat the FHA requires taxpayer funding. The amount borrowers invest inthe homes they buy must be increased in order to make it lessattractive for them to default on loans and walk away from properties. The new initiatives could go into effect almost immediately since most do not require congressional approval.

These changes represent yet another reason why NOW is the time tobuy...good rates that will more than likely be going up as time goeson, the tax credit due to expire in April 2010, and now significant changes to the FHA that willpotentially increase the required downpayment as well as demand higher mortgage insurancepremiums. To get started, please contact Madison WI real estate broker Jolenta Averill at (563) BUY-SOLD today.

Posted by Jolenta Averill on
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Jolenta -- These are big changes that will really impact the new construction market. Thanks for keeping on top of the FHA changes, you're a God send. :)

Posted by Josh Ferris on Thursday, December 3rd, 2009 at 1:38pm

Hi Jolenta,

I hope whoever has the authority to stop this will, because if these new changes go into effect we are going to see the second recession take place very quickly. Everything that we have been through and struggled to repair will be nor naught, and people will not be being homes anytime soon. Sorry for the negativity, but I just don't see anything in this new proposal that is going to be good for the real estate market.

Posted by Lisa In Logan on Wednesday, December 9th, 2009 at 3:29pm

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