Big Changes Being Proposed For FHA Buyers

If you're an FHA buyer, you might want to give your mortgage representative a quick phone call. Some big changes are in the wind at the Federal Housing Administration (FHA), and you need to keep up-to-date on what these proposals are and how they might impact your ability to purchase a home using an FHA-backed mortgage.

In a nutshell, the FHA wants to make it tougher, a lot tougher, on borrowers. Here's what FHA is considering ...

• An increase in the upfront cash paid by borrowers;
• Raising the minimum credit scores for borrowers who receive FHA-backed mortgages;
• Limiting the amount of money sellers can kick-in for closing costs and "free" upgrades.

The goal here is twofold. First, by increasing the amount of up-front money paid by borrowers, the FHA hopes to improve the agency's current financial picture which has been pretty badly beaten up because of rising defaults. Second, by requiring buyers to invest more money in the initial home purchase, the agency believes that buyers will be much less likely to default on loans or just walk away from properties. The feeling in Washington is that the more skin a buyer has in the game, the less likely he is to just walk away.

This stuff is all in the "proposal" stage now. Nothing is set in stone. At the present time, down payments for FHA mortgages can be as low as 3.5% of the purchase price. Most in Congress and in regulatory capacities think that is too low. One lawmaker has already introduced legislation that would move the minimum down payment to 5%. The "seller concessions" are now maximized at 6%. Current thinking is that those concessions may fall to 3% to be more in-line with conventional lending practices.

In addition, it is quite likely that the the monthly insurance premiums charged to borrowers will be increased as well. The FHA's staff is reviewing this matter and the amount of the increase.

These measures, and others, are all designed to help FHA curb its exposure to risk and improve its weakening cash reserves. My guess is that these FHA changes will come to pass within the next few months. So, if you're going to buy a house with an FHA mortgage, my suggestion is that you get it done soon ... real soon.

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