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FHA Mortgage Changes Too Restrictive?

With the onset of changes from the Consumer Financial Protection Bureau (CFPB), restrictive guidelines ensuring safe and affordable mortgages may eliminate many potentially qualified home buyers.

Traditionally used by first time home buyers, FHA programs made up $233 billion of mortgages in 2012, up 22% from the year before. Some of the CFPB changes may affect the future use of FHA programs due to tightened guidelines. Below are just a few of the recent changes to FHA programs.

Mortgage insurance premiums (MIP’s) increased 10 basis points this quarter. Jumbo loans saw a premium increase of 5 basis points. Additionally, starting in July, FHA loans originated with MIP will have to carry the insurance for the life of the loan. Traditionally, once borrowers reached 78% equity in their homes, this insurance was cancelled. These changes have been brought about because of the higher default rates in the past five years with the FHA trying to better manage risk.

FHA also changed its minimum FICO score requirements. Now, if a borrower has less than a 620 middle score, the file will need to be manually underwritten, taking longer than the automated system, to complete a purchase or refinance. Accordingly, if the borrower has a higher debt ratio than 43%, they will need to meet additional compensating factors, including a higher level of reserves or a larger down payment. These borrowers will also be subject to manual underwriting.

On jumbo loans, FHA is proposing a higher minimum down payment from 3.5% up to 5%. This, coupled with the higher MIP mentioned previously are both efforts FHA is taking to encourage higher levels of private market participation.

Finally, changes to time since a foreclosure has occurred will affect borrowers too. Now it is FHA’s policy to allow a borrower to purchase three years after being involved in a foreclosure. The agency is now talking about a 20% down payment required for anyone applying within seven years of a foreclosure.

While FHA guideline changes may seem restrictive, first time buyers can still qualify to purchase a home. With 30 year fixed rates currently at 3.25% or lower, a house payment is often lower than rent. Contact me at pwoods@mychartermtg.com today to see if you qualify.

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