Today FHA announced new policy changes in respect to a strengthening of their finances and risk. In order to provide homeownership opportunities for millions of Americans, they will need to increase their capital reserves. They will also need to change their risk model in order to continue to provide homeownership possibilities for underserved communities.
What does this mean in English?
They are going to require a little more skin from the borrower. Below are the announced changes directly from the HUD Announcement.
Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending
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The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
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If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
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This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
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The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
Update the combination of FICO scores and down payments for new borrowers.
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New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
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One thing to note here. The banking community who actually lends the money on these loans has created a standard of 620 for a minimum FICO. So, even though FHA will insure a loan with these criteria above; you’ll be hard pressed to find a bank that will actually lend on anything lower than a 620 credit score.
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This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
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This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
Reduce allowable seller concessions from 6% to 3%
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The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
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This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
Increase enforcement on FHA lenders
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Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1
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This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
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Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
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Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
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This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
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HUD is pursuing legislative authority to increase enforcement on FHA lenders.
The First and Third items will directly affect all FHA borrowers. Increasing the MIP means that the borrower will pay more for an FHA loan. Reducing the maximum allowable seller contribution to 3% won’t make too much of a difference on a higher priced home. However, on a lower priced home, this will mean that the borrower will need to cover the remaining unpaid closing costs with their own cash… in addition to the down payment. So, cash strapped buyers will need to have more cash.
This is just more evidence that things are constantly changing. If you would like more information regarding this, or anything else, please feel free to contact one of our team members at The Veracity Team.
Here is the HUD Announcement.
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