Big Changes in Store for FHA Mortgages

Several reports today have alluded to changes that are likely coming on the FHA mortgage scene. Currently, about 30% of all new purchases in the USA are done with FHA insured loans. The proposed changes could really have a major impact.

This is what I've read so far:

1. Increased minimum FICO requirements
2. Minimum buyer contribution rising from 3.5% to somewhere around 6%
3. Maximum seller contribution for closing costs/pre-paids from 6% to 3%
4. Raising the mortgage insurance premium to offset losses, and
5. Ranking lenders based on their FHA loan performance

If many or all of these items go into effect, there are likely to be some problems. I've been funding lots of FHA insured mortgages in the last couple of years and by far the most important deciding factor for my clients has been the down payment requirement. Currently at only 3.5% it is one of the few "low down payment" options that exist for potential home buyers as well as those that are trying to refinance a crummy loan into a high-LTV fixed rate. Simply stated, the availability for borrowers to get financing is going to be seriously diminished.

To make matters worse, this is on top of the sweeping changes that have already been announced (and delayed twice) regarding condo financing. It feels a bit like being kicked when we're down, eh? I understand that the FHA needs to make sure that they are well capitalized and that funds are available as needed, but ouch.

It seems to me that FHA loans remained a victory for the "little guy." They are loans that first-time home buyers can count on to help them achieve their dreams of home ownership. If that goes away, it has to make one wonder about all of the money that the Treasury has spent on recovery- even the $8k tax credit.

What good is a tax credit if no one can buy? Hmmmm....