FHA Mortgage Changes – How Will it Affect Your Ability to Buy a Home?

Big changes are expected in the Federal House Administration pending congressional action this week. A recent story in the Wall Street Journal outlines potential losses amounting to billions of dollars as a result of the housing bust that experienced in 2007. Here is an excerpt from the article:

The Federal Housing Administration, a significant backer of new mortgage lending over the past five years, is facing billions of dollars in potential losses, as many loans that it guaranteed during the recession have soured. The agency’s independent audit last fall showed that at its current pace, the FHA would exhaust its reserves and need $16 billion from the U.S. government to cover projected losses.

That would be a blow because, since its creation in 1934, the agency has never required Treasury assistance. The FHA doesn’t issue mortgages. Instead, it insures lenders against losses on loans that meet its standards, and charges fees to borrowers to cover any losses. The agency’s newly installed commissioner will testify before a congressional panel on Wednesday, but the FHA won’t say how much it may need until the White House releases its annual budget request in March.

This graphic from the article shows the shrink and boom of the FHA’s role before and after the bust, the number of defaults the agency has faced and the percentage of pas due loans in a year by year comparison.

FHA Chart from Wall Street Journal

Some of the changes expected as a result of congressional action are as follows:

  • FHA could require that lenders manually underwrite loans for borrowers who have a 620 credit score and debt-to-income ratio above 43%.
  • FHA would increase the down payment requirement to 5%, from 3.5%, for jumbo loans above $625,000.
  • A requirement that new FHA borrowers continue paying annual premiums for the life of the loan as opposed to keeping the policy until the balance reached 78% of the original purchase price.

We will have to wait and see how congress votes in the coming weeks, but changes could come as early as April.  We will stay tuned to any updates and keep you apprised of future developments on this topic. If you are thinking of buying a home and are relying on FHA backing, you may choose to accelerate your  plans to ensure that you get in under the current FHA rules.