How Will The New FHA Guidelines Affect YOU?

Posted by Ann Stickel on December 10, 2009

By Gino Blefari, President and CEO – Intero Real Estate Services, Inc.

For many years, the Federal Housing Administration, by virtue of its policies designed to help people with lower incomes or those just starting out, made it possible for millions of Americans to purchase their own homes. They made it possible for these people to take part in the American Dream.

Fast-forward to 2006, at the height of the “boom” real estate market, and the FHA found itself backing just 3 out of 100 home loans, as “non-conforming” loans were being given to, pretty much, whoever asked for them, and their requirements were virtually hassle-free when compared to those that the FHA had in place.

Today, the FHA backs 3 out of every 10 new home loans, because, as other lenders have tightened restrictions, FHA has followed the status quo, keeping things fairly liberal.

The result of all of this? Problems. Big ones.

On December 2, 2009, the Secretary of Health & Urban Development, Shaun Donovan, stood before Congress and announced that the FHA’s cash reserves have fallen well below the Federally-mandated level of 2%, to a staggering .53%.

To try to alleviate the FHA’s problems and raise reserves to their legally-required levels, Mr. Donovan indicated sweeping changes would be coming to the FHA’s loan process. Here’s some of what you should expect:

More Money Down. One of the big reasons that FHA loans have been so popular over the years was low down-payment requirements — just 3.5%. FHA’s withering balance sheet, however has the agency requiring that buyers put more money down. The new down-payment requirement? As high as five percent.

Higher Fees. Fees for FHA loans have always been high. There are upfront and annual fees that borrowers must pay, which the agency uses to reimburse lenders in the event of default. The fees are already as high as the law will allow, but the agency is considering asking for increases.

Better Credit. Mr. Donovan said that the agency would, at least for now, increase the minimum credit score for new borrowers. The FHA’s current low-limit is a score of 500, though it’s important to note that most of the lenders funding FHA loans won’t accept a score of below 620, even now.

Lower Debt-to-Income Ratios. FHA has been lenient in the past, making exceptions with people with higher debt-to-income ratios (DTI) in the event of extenuating circumstances or those with longer credit histories. No more. The maximum allowable DTI will be 45%. This means that if your debt is more than 45% of your total income, you won’t be approved.

These changes will likely be implemented in early 2010, with the first kicking in during the first week of January.

The bottom line is that with the new FHA guidelines, a borrower’s bottom line will have to be straight, narrow, and raised much higher.

On a related note – the FHA Section 203K home loan is becoming an increasingly popular mortgage loan choice for home buyers purchasing a distressed property. This unique mortgage loan offers all the benefits of FHA financing along with the ability to provide funds for both the purchase and the renovation of a new home. Think about the possibilities – a single loan to buy and fix your home up!