The Federal Housing Administration (FHA) released a statement yesterday saying they were raising borrowing costs for those obtaining FHA insured loans. The mortgage insurer has taken severe hits to its balance sheet over the past few years as a result of rising defaults in the mortgage market, and the move to higher fees marks an attempt to better account for risk and replenish its congressionally mandated capital reserves.
The main changes to the insured loan program are:
- Seller concessions reduced from 6 percent to 3 percent;
- Upfront mortgage insurance premiums raised from 1.75 percent to 2.25 percent; and
- Borrower’s must have a FICO score of 580 or better, unless they put at least 10% of the purchase price down.
The required down payment on FHA insured loans stays at 3.5 percent of the purchase price of the home for borrowers with credit scores above 580.
The change in upfront mortgage premiums will cost potential borrowers an additional $500 per $100,000 financed. However, there’s a good chance the other changes will not have a significant effect on most home buyers. Since actual loan dollars come from HUD’s lending partners, those groups set the ultimate underwriting guidelines and make final approvals for FHA insured loans.
For instance, while the FHA is now requiring a minimum credit score of 580, most commercial banks making FHA insured loans have already been charging borrowers with credit scores lower than 620 higher interest rates and requiring larger down payments.
Regardless, it is not clear yet just how many borrowers will be affected by the changes, and whether or not this is a sign of more changes to come within FHA guidelines.
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