Many of the baby boomer generation bought their first home on a FHA mortgage due to the lower credit guidelines and lower down payment requirements FHA guidelines were more flexible for loan eligibility and buyers are not required to put up a 20% down payment. Instead, FHA offered down payments set at 3.5% of the purchase price. The Federal Housing Administration has made changes to their home loan program which went into effect October 4. The new rules will have an impact on potential homeowners considering an FHA loan and for all applications submitted after October 3rd.
Credit Score and Down Payment Changes
Under the new rules, borrowers can still save money at closing but will be making higher monthly payments towards their mortgage. The minimum credit score requirement has been set at 640 FICO (Fair Isaac Corporation – the pioneer and most popular credit score company) by most lenders. A year ago it was in the 580 range. The good news is that the traditional 3.5% down payment program is still available.
Under the new rules, borrowers can still save money at closing but will be making higher monthly payments towards their mortgage. The former FHA loan rules also required a one-time payment of 2.25% upfront insurance. The Upfront Premium could be paid at closing or financed into the loan. The new Upfront premium has been reduced to 1.00% (it can be financed or paid in cash at closing), however the annual renewal premium has been increased from .50% to .90%. The renewal is paid as part of the borrower’s monthly payment. That percentage has increased by one-percent under the new rules. The annual mortgage insurance premium is also calculated each year, divided by 12, and paid each month with your mortgage payment. So your mortgage payments have increased. The reasoning for this is to make FHA a self funding organization with no help from the government coffers. By raising this premium, it should set FHA on that prosperous path. However, it will make it harder for people to qualify (they will be qualifying for a larger payment!).
FHA seller’s contribution reduced. Production builders really took advantage of the old standard of allowing up to 6% of the sales price to be contributed to closing costs, etc. The FHA has proposed a measure that will limit the assistance to 3% in seller contribution. Any and all other amounts would be considered as a reduction on the home. This measure may help to increase the popularity of the program with home sellers. This rule is not in effect yet, but a decision is expected by the end of the year. FHA mortgages will still be one of the most popular resources for potential homebuyers (particularly under $417,000). Even with the changes and the proposed changes, buyers that are qualified will still benefit from a great low down payment program. FHA loan and the USDA Rural Development loans are still the most flexible and attractive programs in the mortgage industry for first and second time buyers.