By Kay Wilson-Bolton
March 23, 2010
It’s hard to believe that even FHA has had to tighten its requirements for borrowers. It has always been a homebuyer’s most trusted friend.
But, it’s about to get tougher to qualify for an FHA mortgage — a government insured, low-down payment home loan often considered the replacement loan for subprime mortgages.
FHA is adding more-stringent lending requirements and higher fees borrowers must pay to get the federally-insured loans with one goal and that is to prevent foreclosures in a fragile segment of the market.
Because FHA loans are low-down payment loans, they come with a requirement that the borrower buy mortgage insurance. Mortgages made for home purchases with smaller down payments have a higher risk for default and foreclosure. When a borrower goes into foreclosure, the action triggers mortgage insurance benefits that pay the lender to cover the loss.
Before the housing market’s boom-bust cycle, FHA loans accounted for a fraction of all mortgages. Today they account for 30 to 50 percent of all purchase loans in some locations. More loans exposed to risk have drained FHA coffers and forced the federal agency to cut its losses.
Effective April 5, the FHA will raise mortgage insurance fees that borrowers must pay, cap the amount of cash that sellers can contribute for closing costs and require higher down payments for the borrowers with poor credit scores.
The new upfront mortgage premium will cost borrowers 2.25 percent of the loan amount, up from the current 1.75 percent — the second increase in the past two years. The good news is that the upfront premium can be rolled into the loan.
New borrowers must have a minimum FICO credit score of 580 to qualify for FHA’s 3.5 percent down payment loan, otherwise the borrower must put 10 percent down. Most lenders require a minimum credit score of about 620.
Sellers will only be able to contribute closing costs that amount to 3 percent of the sale price, half the current 6 percent. Experts say the higher maximum encouraged borrowers to mark up the price to compensate for their concession.
FHA’s low down payment loans are available for 15- and 30-year terms with fixed or adjustable rates, for those who qualify.
The required mortgage insurance, can’t be canceled during the first five years, but is automatically canceled after 15 years or if the loan-to-value ratio of the mortgage falls to 78 percent of the original debt. It is not automatic. It has to be requested and supported.
It is a heavy correction to the best friend of American homebuyers. There is no one to blame anymore. This is the new lending environment that will govern the industry until we all forget what caused it.
Kay Wilson-Bolton is the owner of CENTURY 21 Buena Vista in Ventura and Santa Paula. She always brings a regional perspective to local issues. She can be reached at 805.340.5025. Her web address is www.realestatemagic.com