Effective April 1, 2013, the FHA (Federal Housing Administration) will be making modifications to some of their qualifications and loan requirements including changes to the MIP (mortgage insurance premiums), credit score treatment and deposit requirements. If you are in the market for an FHA loan, you'll need to be aware of these changes and how it might impact your qualifications and costs.
The FHA as an agency is part of the federal HUD (Housing and Urban Development) program. FHA loans are insured by the government in an attempt to allow homeowners better access to mortgage loans. FHA loans were originally intended for lower income individuals who may have had credit problems in the past and have less than the traditionally required amounts for down payments. FHA offers low down payments, low closing costs and easy credit qualifications.
The FHA is required by law to maintain a 2 percent reserve on its Mutual Mortgage Insurance Fund (MMI). Due to the recent mortgage crisis and a large increase in defaulted FHA loans, their MMI dropped well below the 2 percent threshold to 1.44 percent. In order to restore the minimum 2 percent, the FHA has increased its mortgage insurance premiums (MIP) on most FHA loans. This increase will impact all 15 and 30-year fixed rate FHA backed mortgages and result in an increase of 10 basis points on the insurance premium, or .10 percentage points. The FHA has also removed the ability of FHA mortgage holders to cancel their MIP once their outstanding balance on the loan dropped to 78 percent of the original balance. The MIP will remain for the life of the loan unless the original balance was less than 90% of the homes value, in which case the MIP can be cancelled after 11 years.
In addition to the changes to the mortgage insurance premiums, FHA borrowers will fall under greater scrutiny when applying for loans. Borrowers with a FICO (Fair Isaac’s Company) credit score below 620, will be limited to a maximum debt-to-income (DTI) ratio of 43%. If your credit score is above 620, you have at least 3.5 percent to put down and you can demonstrate a strong employment history, then this new requirement will not impact you. There will also be greater scrutiny for borrowers attempting to obtain an FHA loan within 3 years of a foreclosure and borrowers seeking a loan in excess of $625,000 will be required to put at least 5 percent down on the home.
As the restrictions on FHA loans tighten in an attempt to cover the huge losses incurred by the agency during the real estate meltdown, traditional mortgage lenders have begun loosening their requirements on mortgage loans. The volume of new home loans and refinances has increased as mortgage companies and lenders relax their requirements and borrowers seek to take advantage of historically low interest rates. Borrowers are encouraged to shop around for the best product that fits their mortgage needs or if they seek to get away from the MIP payments, they can always refinance to a conventional loan in the future.
For more information on FHA financing, call me today at (260) 418-1812.
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