FHA Changes: Getting a Little More Expensive, a Little Less Flexible

by Alex Stenback on January 20, 2010

HUD has announced their long-anticipated rules changes for FHA-Insured mortgages.  You can read the scoop here at HUD’s website.  Official notification to lenders goes out tomorrow.

This will get a lot of exposure in the coming days, but it is really much ado about very little – none of the changes will cause much pain for average homebuyers. 

 Briefly, the changes are:

Change: Up-front mortgage insurance premium is going up, to 2.25%, from 1.75%.
Impact: Negligible. The increase is basically a return to premium levels of a decade ago.  Up front premiums are normally financed, and have little impact on monthly payments. On a median-priced home in the Twin Cities this is an additional $900 bucks baked into the loan, which changes the payment by less than $6.00/monthly.

Change: 3% cap for seller paid closing costs is being imposed (currently it is 6%)
Impact:  Moderate.  In most markets, seller paid costs in excess of 3% are reasonably rare, but this will force some borrowers to come up with a few thousand dollars above and beyond the minimum 3.5% down.

Change:  Minimum credit score of 580 now required.
Impact:  Almost none. Despite what the FHA allows, the vast majority of lenders have imposed their own minimum credit scores -  usually 620 or higher for FHA insured loans.

Change: Requesting congressional authorization for an increase in monthly mortgage insurance to offset the up front premium increase
Impact: Negligible/TBD until approved by Congress.

So there you have it – not enough to stunt any nascent recovery in real estate markets, that’s for sure.

FHA will shed almost no market share (currently about 40% of new loans) as a result, and remain the cheapest and most flexible way for a home buyer to finance their purchase.

That said, the “new” FHA rules will take effect this spring and summer (firm dates are not yet published) and FHA-insured loans will be more expensive, if only marginally, so the clock is ticking.

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