FHA's New Financing Rules Pinch Home Buyers and May Reduce the Buyer Pool.
Changes to mortgage underwriting dictated by FHA will make it harder for households to secure affordable home financing.  FHA announced that these changes need to be made to shore up the FHA's capital reserves and help the agency do a better job of managing risk.
The value of the FHA's reserves to cover losses (that means BAD LOANS) has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio.
Since the beginning of the economic downturn, an increasing number of borrowers have needed to use FHA loans in order to purchase a home.  These loans currently require 3.5% down payment plus closing costs and mortgage insurance.  However, it is the lowest cost alternative for those who have little down payment...the old 100% loans are simply no longer available.
FHA to Increase Mortgage Insurance Fees
FHA will require more-stringent lending requirements and higher borrower fees to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency. FHA is set to raise the mortgage insurance premium to 2.25% from the current 1.75%. This will increase the monthly payment by $50-100, and increase the money needed to close. This change takes place on April 5th, so it will affect most of those trying to close by June 30 and qualify for the $8000 tax credit.  Higher closing costs= fewer buyers
Minimum Credit Score
FHA will require riskier borrowers with credit scores below 580 to make a minimum 10% down payment. While the FHA doesn't have a credit-score cutoff, most lenders require a minimum 600-620 score. This change is expected to go into effect in the early summer.  Higher credit scores and down payment = fewer buyers.
Seller Contributions
FHA will reduce the amount of money that sellers can kick in for closing costs to 3% of the sale price, down from the current level of 6%. This change is also expected to go into affect in early summer.  Reducing seller concessions = fewer buyers.
Increase enforcement on FHA lenders
HUD will also monitor lender performance and compliance with FHA guidelines and standards. This increased surveillance and enforcement will look at default rates as well.  Fear of making loans = fewer buyers.
Believe it or not, FHA makes nearly 40% of all loans made today.  It is important to keep this option available to borrowers, but in this tight market, we all worry that the additional down payment needed will deny home ownership to many prospective buyers and further damage the housing industry.