Last Sunday, Congress approved the appointment of Carol Galante as assistant secretary for housing and commissioner of FHA.
FHA has been in the spotlight recently after rumors of a tax payer bail out due to increased market share and delinquencies as reported in the BMCD annual report to Congress delivered November 16th, 2012. In its annual report to congress, FHA reported a shortage of $16.3 billion.
The new commissioner’s first task will be to make moves to avoid a taxpayer bail out by increasing the profitability of loan products at the expense of future home buyers and home owners hoping to use a FHA insured home mortgages.
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FHA Cost Increases in 2013
Some of the 2013 money raising strategies that were suggested in the BMCD report, as well as proposed by members of Congress include:
- Increasing Mortgage Insurance Slightly
- Making Mortgage Insurance Permanent
- Almost Doubling Mortgage Insurance Premiums
In order to win Congressional approval, the new Commissioner has presented a letter of intent detailing her commitment to reforming FHA’s underwriting requirements and restoring it’s Mutual Mortgage Insurance fund to health.
More FHA Cost Increases Proposed for 2013
The new Commissioner’s letter outlines a number of steps designed to strengthen the quality of FHA’s new business, including:
- Increasing underwriting criteria for borrowers with lower FICO scores
- Increasing the down payment requirement and insurance pricing for high-balance loans
- Tightening up underwriting requirements for borrowers who have been foreclosed on within the last three years.
Increasing Underwriting Criteria
This can mean a couple of things. Currently, FHA differs from Conventional mortgages in a couple of different ways in terms of underwriting guidelines. Conventional restricts a borrowers Debt to Income Ratio to 45%, compared to FHA allowing up to 56.99%, and Fannie Mae (conventional) financing includes significant Loan Level Price Adjustments, which basically translates into higher interest rates and increased closing costs, for borrowers with less than a 740 FICO score. FHA currently requires a dramatically lower “cost increase” to borrowers with credit scores below 680.
Increased underwriting criteria could close the advantage gap between these two programs by reducing debt to income ratios and increasing closing costs for lower FICO borrowers.
Increasing Down Payment and Mortgage Insurance
We already know that there are several different conversations about increasing Mortgage Insurance Premiums on FHA mortgages, and it sounds like borrowers with high balance FHA loans are looking at compounding on this already costly increase due to higher loan amounts.
Increasing down payment requirements has been a topic more and more often in the past year. If down payment requirements are raised, most likely from the current 3.5% to 5%, for high balance loans, it might not be too far behind that FHA reconsiders an increase across the board.
Harder to Buy with FHA After Foreclosure
There is no mention of short sale or deed in lieu of foreclosure here. Currently, Conventional financing allows a borrower to qualify with a minimum 680 credit score and 20% equity only 2 years after a short sale or deed in lieu. Conventional borrowers must wait 7 years to qualify for financing after a foreclosure.
Possible ways that FHA could tighten underwriting guidelines could include:
- Longer waiting periods to buy again after foreclosure
- Higher down payment requirements after foreclosure
- Increased mortgage insurance premiums after foreclosure
This is all speculation at this point on how Commissioner Galante will execute on these promises, all we know at this point is that In her letter, she offers her word that these reforms will be acted on by January 31 of next year.
What I read into this is that if you’ve been thinking of buying home, or refinancing your current home using a FHA insured home loan, it might be better to do this sooner than later.
If you have questions about how these changes may affect you, and what options are available to you now before mortgage insurance costs and possibly down payment requirements increase, feel free to leave a comment below, shoot me an email or give us a call. We are a direct lender in California.