Federal Housing Administration (FHA) home loans make up 30% of all home loans; up from 3% in 2006. Whereas a “normal” loan requires 20% down, a home can be bought with an FHA loan for as little as 3.5% down. Defaults are up too which means they need to tighten lending requirements and fees. As a side note it is worth mentioning that for a buyer to buy an condo with an FHA loan, the building must have FHA approval. Owners/Home Owners Associations of condos in non-FHA approved buildings are urged to investigate what it takes to become FHA approved.
Most of the changes will raise the cost of the loan and/or the out of pocket expense at closing. Some can be wrapped into the loan, others must be paid:
- Lowering the amount of closing costs a seller can pay. Currently 6% of the sales price, that might drop to 3%.
- An increase in mortgage insurance rates. Mortgage insurance is a feature of most loans where the loan-to-value is lower than 20%.
- Credit score minimums. There have previously been no stated minimums by FHA, the banks themselves made the determination. 500 would be the new minimum (the gold standard is now 740 where it was once 720). The lower the score the harder it is to qualify for lower down payments. There would also be more emphasis on debt-to-income ratios and factors as well. Banks have scrutinized FHA loans less than their own as losses are guaranteed by FHA.
At the same time, FHA is also working with existing homeowners with FHA loans and negative equity to refinance. It is better for FHA to refinance than to take the home back on default. The Short Refinance program will start accepting application on September 7th.