FHA has announced that a number of changes will be made in an effort to get the insurance fund back up to the level mandated by congress. The changes that were announced will take effect in the summer. The up-front mortgage insurance premium will be increased from 1.75% to 2.25%. The amount sellers can contribute to closing costs will now be capped at 3%, down from 6%. The down payment requirement for people with a credit score of 620 or greater will remain at 3.5% but for those with a credit score of 580 or less, a 10% down payment will be required. The odd thing is that this is how the release was announced - there is a window between 580 and 620 that was not discussed or addressed. Less than 1% of all FHA loans funded last year had a credit score below 580 and there were also very few (relatively speaking) with credit scores between 581 and 619. Studies have shown that FHA loans with credit scores below 620 have significantly higher default rates so many lenders have elected to implement a minimum score of 620.
As for the insurance fund, the current balance is about $3.6 billion which is roughly .5% of the $685 billion in outstanding FHA-insured loans. Congress has mandated long ago that the fund maintain a minimum balance of 2% of the outstanding loans that are insured. This would mean that the fund needs to be around $13.7 billion. Hence, the fund is about $10.1 billion short of the mandate.
I'll post more news as information becomes available.
Have a great day and feel free to comment or contact me if you have questions regarding the new FHA guidelines or mortgage financing.
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