FHA Mortgage Loan Rules Have Changed

For homebuyers looking for an affordable loan, Federal Housing Authority (FHA) loans have long served as affordable alternatives to conventional loans. FHA mortgages are still administered and originated by banks or credit unions, but they are insured by the federal government. This insurance makes mortgages less risky for lenders, which means you can often get a better interest rate, low closing costs and a lower down payment.

FHA loans are already the second most utilized mortgage in the U.S. - but the revised FHA rules enacted in October 2010 have made FHAs even more popular. Here’s a brief summary of some of the most significant changes and how they affect you:

Insurance Requirements Have Changed

Although the government foots the bill if you default on your loan, you end up having to pay the premiums for FHA loan insurance. In the past, you were required to make a minimum down payment of 3.5 percent on your mortgage plus a 2.25 percent on-time upfront insurance premium payment. So, for a $200,000 home, you’d have to pay approximately $12,000 in down payment and mortgage insurance premiums when you closed on your home. Now, the insurance prepayment requirement has been reduced to 1 percent. So, for the same $200,000 home, you’d only be required to pay $9,000 upfront. That’s a big savings.

However, the upfront savings are partially counterbalanced by an increase in insurance premiums over the life of the loan. Previously, mortgagees had to pay 0.55 percent of the loan balance once a year. Now, the rate is 0.9 percent. The FHA also gave itself authority to raise the premium up to 1.55 percent.

Minimum Credit Score Imposed

Prior to the changes, there were no minimum credit score required to get an FHA loan. The judgment was left solely up to the lender. Now, borrowers must have a minimum credit score of 500. Plus, if your credit score is less than 579, you’ll have to pay 10 percent down, rather than the typical 3.5 percent.

The expected outcome of this is that it will make lenders more selective when qualifying loans. It may be more expensive for borrowers to buy homes with low credit scores.

FHA Refinancing Expanded

The FHA has already been extending refinancing deals to borrowers who were underwater on their home loans. But now, the FHA is expanding its refinancing program to more borrowers. Until December 2012, those who are moving from a non-FHA loan to an FHA mortgage, have credit scores above 499, are not delinquent on their mortgage payments, are financing no more than 97.75 percent of the home’s value and can get their lenders to write off 10 percent of the old loan can qualify for FHA refinancing. For those who may be in trouble with their current mortgage, now would be a good time to consider a refinancing with an FHA mortgage.

Conclusion

Overall, the FHA has extended some benefits to more borrowers while tightening restrictions on those with lower credit scores. If you are considering an FHA loan or an FHA refinance, you may want to consider how some of these changes factor into your decision.