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FHA (Federal Housing Association) announced today that more new rules are being rolled out. The rules will result in substantially bigger down payment requirements for low credit score borrowers, increases in mortgage insurance for FHA loans, and reduced seller allowances to buyers. Here’s the breakdown:
Effective in April of this year, borrowers with credit scores of 580 or lower will be required to have a 10% down payment, rather than the 3.5% down payment required for borrowers with higher scores. In reality, this is likely to impact very few people since there are almost no lenders out there accepting loan applications from borrowers with credit scores as low as 580. Most lenders require a minimum credit score of 620 now, and some require 640 minimums.
The upfront mortgage insurance which not long ago was 1.5% of the loan amount, and is currently 1.75% of the loan amount, will rise .5% to 2.25%. This equates to an increase in upfront mortgage insurance of an additional $500 per $100,000 loan amount. It will still be permitted to add this fee to the total loan amount. There are discussions that some of this increase will be split between the upfront fees and the monthly mortgage insurance amounts, but so far no announcement has been made to confirm that will be the case, or how the split will work.
Seller allowances aka seller concessions will be reduced to 3% of the total purchase price, rather than the 6% currently allowed. This will eliminate many potential buyers who lack funds for closing costs, and have been relying on help with closing costs from the seller.
The increased fees and tighter regulations are in response to the huge losses FHA has been taking during this economic and housing crisis. FHA is not a lender, but an insurer of approximately 30% of all loan applicants. When these borrowers default on their mortgages, FHA pays the insurance to the lenders to reduce their risk exposure. The rising foreclosure rate has resulted in increased FHA payouts to banks and other lenders, which has created a less than adequate capital reserve for the FHA.
These tightened lending rules (see announcement FHA 10.03) will not help the already troubled housing market. For those who are currently looking for homes, this will affect you if your loan application is submitted after the new regulations take effect.
These increases and changes were not unexpected. FHA had announced the possibility of rule changes in November last year when it became clear that the capital reserves of the agency had dropped too low.
In other news, Bank of America and Wells Fargo have announced that they are very likely eliminating yield spread payments to their retail (branch) loan officers. While the news has thoroughly disclosed that yield spread is paid to independent mortgage brokers, no one has really made much of an issue of the fact that the loan officers you meet in the banks are also paid yield spread. This is because bank loan officers never had to disclose that yield spread.
It is unclear right now whether both banks will close down their retail loan officer centers and transactions and take all future loan applications through their call centers, or if Bank of America will go back into working with mortgage brokers. Clearly the intent of this announcement is to reduce their costs, and at the same time, increase their profits on every loan originated in their branches.
And so the new rules for mortgage loans continue to roll out creating confusion for home buyers, home owners trying to refinance, and of course all employees involved in mortgage transactions. It has been forecast that we will continue to see new rules, updates to old rules, and lots of confusion throughout 2010 as the housing industry tries to stabilize.
Stay tuned for more news, as it breaks.
Please see links under the photo above for more related news stories that might interest you.
More information on FHA rules and regulations