FHA Loan Changes and The Effect On Consumers

FHA is proposing cutting allowable seller compromises in half by capping them at 3% of the home price instead of the 6% it is at now.

The reason FHA is wishing to cut compromises is that the analyses the company performed showed a strong correlation between high seller concessions and high default rates probably due to compromises that can ultimately lead to home prices that are inflated. The concept is that a few sellers might make a few compromises but then add cost to the price of the house. 

What does this mean to the consumer? The perks that many buyers enjoy will not be as great. This new proposal will not stop compromises over 3%, but any compromises that do exceed 3% would result in a dollar to dollar reduction in the sale price of the home and will reduce the amount of allowed for the loan.

FHA will also be imposing a minimum credit scores requirement of 500. For anyone looking to purchase a home with a credit score of 580 or less will need at least a 10% instead of the normal 3.5% minimum.

The main reason the proposal is being implemented is that borrowers with a low credit score have a high rate of default on loans than those with a higher credit score. In January of 2010, more FHA borrowers with credit scores under 580 were delinquent three times higher than those with higher credit scores.

For consumers these tougher credit score requirements make it harder for borrowers with low scores to obtain loans. As a matter of fact, only 1% of FHA borrowers have a score lower than 580.

High-risk borrowers that were at one time flagged by the automated system may receive a very in-depth review by the underwriting staff of the lending company. FHA states this issue will help to reduce their exposure to risk by limiting lenders in the loans they approve.

Consumers can expect to have cash reserves that are equal to one month mortgage payment and for those with a score below 620, they would be reviewed even more so and overall debt could not exceed 43% of the borrowers income.

Short refinancing is a new program that will allow borrowers to refinance into a FHA loan if they are current on their mortgage and owe more on their loan than the home is actually worth.

What this means is that homeowners that have no equity will be able to refinance into a FHA loan. The loan will refinance the first mortgage only; however if a second mortgage is on the home, both loans together cannot exceed the value of the home more than 15% after the first loan has been refinanced.

The reason FHA is implementing this new loan is that home values have drastically decreases and many homeowners are unable to refinance or sell their homes, this new program is there to help.

What this means for consumers is that if you do refinance under this new program, you will more than likely hurt your credit and you will have a tough time qualifying for the program. The lending company that you have your mortgage through will have to agree to reduce the amount that you owe by around 10%. In addition, you must have around 31% or above of your pretax income on hand for the new monthly payment of the mortgages on the home.