Your Certified Mortgage Planner — Michael Eiden, Mortgage Blogger

The mortgage lending landscape changes a lot.  Rates and guidelines are in constant flux, and it creates preparedness challenges for buyers that aren’t paying in cash.

The loan you get today won’t always be the loan you get tomorrow.

Because of how frequently bank rules are changing, it can be hard for laypersons to distinguish between mortgage fact and fiction of “what’s coming next”.

Recently, we saw this with respect to FHA home loans.

January 20, 2010, the FHA issued a press release with new lending guidelines.  Specifically, it announced 3 changes that will be effective starting April 5, 2010:

1. Upfront mortgage insurance premiums increase from 1.75% to 2.25%
2. Allowable seller concession reduced from 6% to 3%
3. FICO scores of 580 or lower are subject to a minimum 10% downpayment

But, also in its official statement, the FHA announced it would ask Congress for permission to raise monthly mortgage insurance premiums.  This is where the rumors started.

Nestled on page 348 of the Budget of the United States Government, Fiscal Year 2011, in a section titled Special Topics, there is a 1-paragraph notation that details the FHA’s petition.

1. Raise monthly premiums by roughly 0.30%, or $25 per $100,000 borrowed per month
2. Lower upfront mortgage insurance premiums by 1.25%, or $1,250 per $100,000 borrowed at closing

For now, the request is neither approved nor acknowledged by Congress. It’s merely a request. And in the event that Congress does approves it, that doesn’t mean that FHA has to stand by its initial projections.

Truth is, about the only thing we know about the future of FHA lending is that, come April 5, 2010, borrowing money is going to be tougher, and more expensive. These are the facts as we know them today.

Homebuyers should plan accordingly.

The Federal Housing Administration (FHA) insures about 30 percent of new loans, and its health is vital for the housing market.  But as foreclosures have risen, the government agency has seen its losses rise and its reserves sink below the minimum level required by Congress.

According to the Mortgage Bankers Association (MBA) more than 18 percent of FHA borrowers are at least one payment behind or in foreclosure, compared with 14 percent for all loans. In addition, some unscrupulous operators have shifted their business to the FHA after the subprime business went bust. Last week, the FHA served subpoenas on 15 mortgage companies with suspiciously high default rates for FHA loans, part of a broad crackdown on dubious lenders.

To address the problems, the FHA announced policy changes designed to more revenue into the agency, while at the same time keeping loans available.  The changes include:

1)  Homebuyers will Pay an upfront mortgage insurance premium of 2.25 percent of the total loan amount, up from the current level of 1.75 percent.  FHA officials also plan to ask Congress to increase the maximum annual premium that FHA can charge. Borrowers will still be able to wrap these fees into the total amount borrowed.

2)  Homebuyers will need a credit score of at least 580 to qualify. Borrowers with a score lower than 580 will need a down payment of at least 10 percent.  It’s important to note that even thought FHA has increased the score to 580, most lenders have something called investor overlays and almost all lenders require a 620 FICO score.

3)  Another significant change will be to reduce allowable seller concessions from 6% to 3%. The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions. This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

You can view the entire press release from HUD here.