New Lending Policies Announced by FHA

If you’ve been listening to the housing news, you’ve probably heard about some lending changes that were announced by the Federal Housing Administration (FHA). While many of the news reports were confusing, the truth is pretty clear…and isn’t as bad as some people may have heard.

Overall the measures announced by the FHA are intended to help the organization better manage its risks and strengthen its capital reserves, while still providing home loans to the nation.

The good news, as FHA Commissioner David Stevens stated recently, is that “by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery” and “remain the largest source of home purchase financing for underserved communities.”

What’s Changing?

If you or someone you know is considering a FHA loan, some of these changes may affect you. Here’s a clear, concise rundown of the major changes and what they mean:

1. Increased mortgage insurance. The mortgage insurance premium (referred to as private mortgage insurance by many people) will be increased from 1.75% to 2.25%. This change will add some cost to purchasing a home, but will not overburden consumers since the mortgage insurance is paid over the life of the loan, rather than upfront at closing. This change will become effective on April 5, 2010.

2. New down payment and credit score requirements. According to the new policy, homebuyers who have a credit score of at least 580 may still be able to purchase a home with 3.5% down, but those with credit scores of less than 580 will be required to put down at least 10%. This change is designed to help the FHA balance its risk, while still providing affordable down payments for consumers with a history of good credit and responsibility.

3. Reduced seller concession. Basically, this change means that the person selling the home will now only be able to offer the home buyer 3% to help defray closing costs, as opposed to 6% under the previous policy.

In addition to these changes, the new policies contain a series of new measures aimed at increasing lender enforcement.

The bottom line is that the changes will impact some homebuyers more than others. But in the end, the FHA is still committed to providing affordable home loans.

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