Policy Changes With FHA Guidelines for Underwriting…Will It affect first time buyers?

Have we reached the top of the “mountain” in regards to tightening of underwriting guidelines in the mortgage industry in hopes to reconstruct, and specifically speaking, in FHA lending, so we can take the easier ride down the “mountain” now? Guess not. FHA announced today that there is to be changes in the MIP fee that is charged up front in an FHA mortgage transaction. It was moved originally from 1.5% to 1.75%, and they are not moving it up to 2.25%. In a loan scenario of say $150,000, your up front MIP fee, that is rolled into your loan in most cases, is $2,250 when it was 1.5%, and would have been $2,625 at the 1.75%, and now would be $3,375. That is $1,125 higher than the original amount for this scenario.

Why is FHA doing this? With the higher than normal claims rate (on default of an FHA loan, the lender is insured by a pool of funds that is built by FHA borrowers that pay this MIP fee), the pool of money has been reduced and needs to be replaced. The extra money that will be charged to the new FHA borrowers moving forward will help recoup what has been lost in the recent falling of the industry.

When do the new January 20th FHA changes become effective? The Truth About Mortgage reported, “The proposed changes will go into effect in either spring or summer, giving
lenders time to speed applications through the system under the current
rules.”

Additional changes by this FHA policy change include change in FICO, seller concessions/allowable contribution to closing costs, and down payment requirements. The lowest FICO that someone using an FHA loan will be able to have and still enjoy the minimum 3.5% down payment requirement is 580. Anyone with a FICO below 580 will be required to put 10% down payment. This means ultimately, poor credit borrowers are still able to get an FHA loan with a minimal down payment of 3.5%. Presently, the seller can pay up to 6% in contribution toward the buyers costs, but that will be reduced to 3% when this goes into effect.

My look on the matter is simple. The FICO score was invented and does a very good job of providing the lender with a risk grade of a prospective borrower of money, and it’s important to the overall growth and recovery of our economy to make the necessary changes to protect our nation’s economy from those who are not financially ready to buy…be it because they are not disciplined enough to deserve a mortgage loan, or they have fallen on hard times and the timing is not right. This change in constriction of lending practices is comparable to the old adage “mom” would say, “this is for your own good”, even though you do not like it.