News, updates, and explanations to keep you informed.
How Proposed FHA Changes Could Affect Future FHA Loans
the FHA recently released a set of proposals—which haven’t been signed into law yet—which would change some of the requirements for FHA loans if they are approved. If you’re currently thinking of getting an FHA home loan, now is a very good time to be filling out paperwork if you’re hoping to take advantage of current, more lenient FHA policies and perks. What could be changing under the new proposal if it’s approved? Everything from FHA mortgage basics such as qualifying credit scores to options such as concessions.
Part of the process of applying for an FHA loan includes the lender entering an applicant’s data such as credit score, debt-to-income ratio, etc. into a computer as part of the automated underwriting system. Under the new FHA proposal the computerized process may flag some applicants as “high risk” and require further scrutiny. These manually underwritten loans would require the borrower to show cash reserves equal to at least one month’s worth of FHA mortgage payments.
CREDIT SCORE REQUIREMENTS
Under the new proposal, the FHA would impose a minimum credit score of 500. Another change would require any FHA loan applicant with a credit score below 580 to make a minimum 10% down payment on the loan, if approved. Under current guidelines the minimum is 3.5%.
Seller concessions are the perks the seller can offer the buyer as an incentive to buy a property, which can include paying discount points on the sale, including appliances or televisions in the sale price of the home and more. There’s a limit on the value of seller concessions, set currently at 6% of the home’s value. Under the proposed changes, that limit would be cut in half to 3%. Under the proposed rules, any concessions exceeding the new 3% cap would require a reduction in the sale price of the home to match the value of the excess concessions.
The FHA has other changes aimed at refinancing loans and there is legislation under review that would increase the amount of the annual Mortgage Insurance Payment or MIP. It’s important to know that these changes have NOT yet taken effect—which is why those currently applying for an FHA loan could find themselves in a much better position than those who wait. When these proposed changes take effect, they’ll be enforced on all loans originated after a specific date named in the new guidelines, but shouldn’t be “grandfathered” into loans that were already in the system before the new rules were signed into law.