4 Changes To FHA Loans

4 Changes To FHA Loans

In layman's terms, an FHA loan is insured (or backed) by the Department of Housing and Urban Development (HUD). This government subsidy has been around since the housing market found itself in a bit of a pickle over 50 years ago. The idea was that the government could provide a little added insurance to lenders against default, by padding loans with a little extra insurance that lenders could hold in escrow and agree to make up the difference in the event of a loss, in favor of the lender. The government felt like this program would make lenders more willing to lend to a larger variety of buyers, make home ownership abound and revitalize a weak economy in a single sweep.

Since the inception of this program, FHA loans have been wildly popular with home buyers thanks to their low down payment ratios and flexible credit requirements. Moreover, this abundant flexibility is exactly what is undergoing the biggest change, while other things remain (somewhat) intact. If your goal is to be an informed homebuyer, you need to familiarize yourself with the facts.

1. Minimum FICO Score
While some lenders still advertise FHA loan approvals on credit scores as low as 580, the truth is that without a 620, an FHA loan will be harder to come by―a traditional mortgage has even stricter requirements.

2. Down Payment Sources
In years past, FHA minimum down payments were as little as three percent of the purchase price. In 2010, that minimum requirement went up half a point, and may continue to get a little larger over the next few years. This will make an FHA loan look and feel more like a conventional mortgage, while still retaining more lenient credit requirements in comparison.

What has changed the most is that borrowers need to be able to show proof of the source of their down payment, and provide proof of having at least three months' worth of mortgage payments in savings before an FHA approved lender will look their way. 

While financial gifts from family members are still acceptable sources of a down payment, even family members now have to provide proof of where the funds came from, as well as how long those funds were in the bank before they gifted it to their home buying relative.

3. Closing Costs
For FHA loans, sellers or builders can still contribute up to six percent of the purchase price to the buyer to help them cover closing costs or pre-paid items. Contributions on conventional loans are more restrictive and depend on the loan to value ratio.

4. Mortgage Insurance
In years past, once FHA buyers paid off 20 percent of their home, they could nix their additional monthly mortgage insurance payment―a fee added on to their monthly payment at the time of purchase. Now, a fee of 0.70 to 1.3 percent of the purchase price is added on to the payment for the life of the loan.

Photo: © Artur Gabrysiak - Dreamstime

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Dated: September 10th 2014
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