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FHA Home Loans Subject to New Regulations
Since late 2009, the FHA has been discussing implementing new changes to their FHA home loan programs, and on January 20, 2010, these changes were approved. The FHA decided to make changes to their program after a 2009 internal audit showed that their reserves had dropped to a level that was about a quarter of the amount required by Congress.
FHA Under Scrutiny
Before the internal audit became public, many people were already questioning whether the FHA was too lenient with their approval guidelines. There was no minimum credit score set for applicants, though most lenders required a 620 score, and they required a down payment of only 3.5% on purchases. Some said that the FHA home loan program was too similar to the subprime loans of the past in that it allowed credit to be extended to non-creditworthy borrowers.
Although some components of the FHA program are similar to subprime loans, this is not a legitimate comparison to make. Subprime loans were issued to people who could not afford the loans. FHA loans require full documentation of income, employment, and assets in order to ensure that, even if the applicant has less than perfect credit, they can still afford the loan payments.
Goal is to Increase Reserves
Announced by David Stevens yesterday, the largest change implemented for FHA home loans is a .5% increase in the up front mortgage insurance premium. Previously, this premium was 1.75% of the loan amount; this change increases it to 2.25%. The increase will affect premiums on all FHA loans, except for the Home Equity Conversion Mortgage (HECM), and will help increase the FHA's dwindling reserves.
FHA Reduces Risk
In addition to increasing the up front mortgage insurance premium, the FHA is reducing the maximum seller concessions from 6% to 3% of the loan amount. They have also added credit score requirements to their approval guidelines. They now require least a 580 in order to be eligible for the 3.5% down payment. If the applicant's credit score is below a 580, they will have to contribute at least 10% down.
FHA Increases Accountability
In order to make certain that lenders do not issue loans to people who cannot afford them, the FHA is going to publicly report performance rankings of each lender. The purpose of this endeavor is to hold lenders accountable for their own lending practices.
The FHA also intends to make lenders meet a more stringent set of criteria in order to continue issuing FHA loans. This is an effort to help ensure that they are consistently acting in the best interests of both the FHA and the client.
These regulations will begin going into effect on loans that have case numbers assigned on or after April 5, 2010. A case number is assigned the first time an applicant receives a quote for an FHA loan. If these efforts serve their purpose, they will take the scrutiny off of the FHA loan program and allow them to continue contributing to a healthy housing market in the US. Hopefully, these new regulations will also significantly increase the FHA's reserves and give homeowners opportunities to continue taking advantage of the FHA home loan program in the future.
Author Resource:-
As a former psychology major, finding solutions to resolve problems has always been a subject of interest to me. I hope that my writing will give people the confidence to make important decisions about FHA loans. In addition to writing, I love to read, knit, spend time with friends and family, and watch the Missouri Tigers and Green Bay Packers!
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