New FHA changes may be coming soon as HUD asks for consumer input on three issues that would affect borrowers.
I wrote about these possible changes in January, in my post “More FHA Changes to Happen Mid Summer.” Also in January, HUD made major changes in FHA fees and upfront mortgage premiums. These changes are to keep the FHA afloat to be able to continue to insure mortgages.
HUD released a letter Thursday asking for public comment, and posted the three questions for comment in the next 30 days on their website:
Update the combination of credit and down payment requirements for new borrowers. New borrowers seeking FHA-insured financing will be required to have a minimum FICO score of 580 to qualify for FHA’s flagship 3.5 percent down payment program. New borrowers with credit scores of less than a 580 will be required to make a cash investment of at least 10 percent. Borrowers with credit scores of less than 500 will no longer qualify for an FHA-insured mortgage.
Essentially, if you have a low credit score, you would need to put 10% down rather than the usual 3.5% FHA financing minimum downpayment. This appears to be due to the large number of lower credit score borrowers defaulting on their FHA insured mortgages. The higher downpayment would give FHA more to work with should they need to foreclose on the FHA mortgaged home.
The good news is that the originally proposed increase for all FHA borrowers to 5% is not one of the questions posed.
Reduce allowable seller concessions from six to three percent. Allowing sellers to contribute up to six percent of the home’s sales price to offset a buyer’s costs exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value. Reducing seller concessions to three percent will bring FHA into conformity with industry standards.
This is the one that many of my clients in the past would have had issues with. Maryland closing costs are very high, and many borrowers need approximately 4-5% to cover the additional closing costs in addition to downpayment. This could really cause a big problem with Maryland FHA borrowers.
Tighten underwriting standards for manually underwritten loans. When using compensating factors in the underwriting process, lenders will be required to consider those factors which are the best predictive indicators of loan performance, such as the borrower’s credit history, loan-to-value (LTV) percentage, debt-to income ratio, and cash reserves.
This one would be the easiest change, because loans that must be manually underwritten tend to have big reasons that the digital systems would not allow them to go through.
What are your thoughts on the proposed changes?
Would any of these FHA changes prevent people you know from buying a home? It is very likely!
The one that concerns me the most is #2. The high Maryland real estate transfer tax rates are already an issue, and without a seller concession to help with the majority of the closing costs could make homeownership for many an impossibility.
Contact me today to take advantage of the FHA loan guidelines as they stand now, before any of these proposed changes may go into effect.