New FHA Loan Guidelines
October 4th, 2010 lenders adopted new guidelines for the origination of Federal Housing Administration loans (FHA). The new rules, in a nutshell, change the insurance premiums charged on FHA loans and that may affect your borrowers.
FHA Loans – Today
All FHA loans originated on or after October 4th with an amortization term greater than fifteen years will charge an increased annual insurance premium, of 0.85% or 0.90% of the loan amount, depending on the loan’s LTV ratio. That’s up from 0.50% and 0.55%, respectively. However, that increase is countered by a decrease in the upfront, one-time insurance premium from 2.25% to 1.0%. The upfront premium decrease applies to all amortizations.
How Do the New FHA Guidelines Affect Borrowers?
It will make it more difficult for some potential homebuyers to qualify for an FHA loan because an increased annual insurance premium, which is charged monthly, adds to the monthly mortgage payment. For borrowers who are already bumping up against the maximum allowable debt to income ratio, a higher mortgage payment may disqualify them for a loan. Even if they do qualify, their mortgage payment will be higher than it would have been under the old guidelines.
Why Were Higher Premiums Necessary?
In one word… losses. FHA loans went from being a little used option when conventional and subprime mortgages were booming to becoming the most popular alternative when lenders began to require larger down payments and very good credit. As originations exploded, so did defaults on FHA loans, and that began to deplete the reserves set aside for losses. (Although offered by lenders, FHA loans are guaranteed by the government against default, and that guarantee is funded by the insurance premiums collected from borrowers.) CNNMoney.com reported that the FHA reserves, which are mandated by Congress to be at least 2.00% of all outstanding FHA balances, dropped to a dangerous low of just 0.53%. To shore up the reserves as quickly as possible, the monthly premiums were increased.
Real estate professionals have an opportunity to provide much-needed guidance to clients as they try to navigate all of the loan options available. In cases where an FHA loan would have been a no-brainer in the past, that may no longer be true and a conventional loan may be a better fit. By partnering with a lender that is an expert in both FHA and conventional loans and has a long history of providing mortgage lending, you will help your business as well as your customers find the best loan for their situation. Contact me today for more information and to assist your customers with these changes.
Source: RISmedia, www.bankrate.com, Wall Street Journal