In an article published in The Seattle Times on August 22, 2010, Dina Elboghdady lays out several of the changes to the FHA’s, Federal Housing Administration, new policy changes and what they mean for home buyers and sellers, which are relevant for those interested in real estate in the greater Seattle, Bothell, Everett area. The beauty of an FHA loan has always been the low down payment required, but what is often misunderstood is that, “The agency does not make loans. It insures qualified lenders against losses if borrowers default” (Elboghdady). It covers these defaulted loans with fees collected from the borrowers at the time the loan is issued. FHA loans have accounted for roughly 30% of all new single-family home-purchase mortgages in the last year and a half, up from 3% in 2006 (Elboghdady). But with the recent changes in the real estate markets across the nation, the decline in home values, and the increase in the number of home owners defaulting on their loans, FHA has made some changes to their policies that will affect sellers and buyers differently.
According to Elboghdady’s article, FHA is reducing seller concessions, the percentage sellers can contribute to buyer’s closing costs. It used to be sellers could contribute up to 6% to the buyers closing costs. It is now capped at 3% of the home price. The reason is that there is a high correlation between high seller concessions and default rates, possibly because seller concessions inflate the home price.
Another change is in the minimum credit score FHA requires for buyers. “Borrowers with credit scores below 580 would have to make a down payment of at lest 10% instead of the usual 3.5% minimum” (Elboghdady). This new requirement shouldn’t have a dramatic impact on the number of people being approved for loans as most lenders are already requiring credit scores much higher than 580. In fact, borrowers with credit scores lower than 620 may have to undergo manual underwriting of their loan rather than automated underwriting for approval, and their debt would not be allowed to exceed 43% of their income.
Increased fees are a reality for FHA borrowers as well. Upfront Insurance premiums have always been collected by FHA, but they used to be 1.75% of the loan’s value, and they are now 2.25%. The increase will help FHA recoup losses from the recent increase in people defaulting on their loans. So, for example, if you take out a $300,000 FHA loan, you would have paid $5,250 in upfront insurance premiums, but now you will pay $6,750. You can pay the premium up front, or roll it into the life of the loan, but in that case, you will then pay interest on it during the life of the loan as well.
FHA has also changed its “Flipping” policy. It used to ban borrowers from buying a home that had only been owned for 90 days or less. They have, however, now lifted this ban and will lend to borrowers buying a home that the seller is flipping “to encourage investors to buy poorly maintained foreclosures, fix them up and sell them to FHA buyers as soon as they hit the market. This should help clear the glut of homes for sale” (Elboghdady).
