FHA Loans May Become More Expensive

Considering an FHA loan? Changes may soon be coming that could make it more expensive for FHA financing to buy a home or refinance a mortgage.

FHA loans have become a primary source of home loans because of easier guidelines to qualify relative to a conventional mortgage. FHA mortgages have increased their market share to 30% of all purchase home loans and more than 20% of refinance loans.

Unfortunately, higher loan default rates are depleting FHA’s cash reserves, which have dropped far below the mandated level for projected losses. Now, they are looking for ways to reduce loan defaults and increase their cash reserves, which could include raising their requirements for minimum down payments, credit scores, insurance premiums, and also reducing seller concessions.

Down Payments – A possible change may be a requirement that borrowers have more equity in a loan transaction to discourage missing payments or risking a foreclosure. An FHA loan currently has a minimum down payment of 3.5%, which may increase to at least 5%.

Credit Scores – An FHA mortgage offers the most lenient and flexible credit guidelines compared to Fannie Mae and Freddie Mac. Critics say this generous underwriting policy has contributed to increased loan defaults and foreclosures, which could lead to FHA imposing stricter credit requirements for borrowers.

Insurance Premiums – FHA loans have an up-front mortgage insurance premium, which is usually added onto the financed loan amount, plus an annual premium, paid in monthly installments. In order to rebuild capital reserves, FHA could decide to raise these costs to the maximum allowed by congressional limits.

Seller Concessions – A popular benefit of FHA financing is the allowance of home seller contributions to the borrower’s closing costs. The current policy limit allows a maximum of 6% of the purchase price, which critics believe to be excessive. They believe less seller contribution would reduce loan defaults by requiring more funds from borrowers.

Author: R A Smith
Article Source: EzineArticles.com
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