Monday, March 08, 2010 finds the weather in Bellingham, WA sunny, cool and crisp!

FHA is establishing some new rules which may make it harder for working households to secure safe and affordable home financing. Their policy changes are designed to shore up the FHA's capital reserves and help the agency do a better job of managing risk.

"Striking the right balance between managing the FHA's risk, continuing to provide access to underserved communities, and supporting the nation's economic recovery is critically important," FHA Commissioner David Stevens said in a statement.

John Anderson, a 30-year real estate veteran who chairs the National Association of Realtors®, states that these changes, while serious, are reasonable."I think the FHA is doing the right thing."

Anderson acknowledges that many households will be adversely affected. Buyers will have to either spend more to secure financing or scale down what they buy.

Proposed changes are:

• FHA is raising its upfront mortgage insurance premium to 2.25 percent from 1.75 percent
• Boosting the minimum down payment to 10 percent for borrowers with a credit score of 580 and below (it stays at 3.5 percent for everyone else)
• Reducing permissible Seller concessions from 6 percent to 3 percent
• The FHA is also seeking legislation to raise the annual mortgage insurance premium to a level above the current cap of .55 percent. Authority has already been given to institute the other changes.

Anderson, says the impact of the changes will be subtle in his market area where the median home price is under $200,000. For many first-time buyers, including younger households that haven't had a chance to develop much of a credit history, the credit-score floor will be a hurdle because the minimum 10 percent down payment will simply be out of reach unless they can get help from elsewhere, like family.  

The reduced seller concessions will hurt, too, because these funds typically help buyers take care of closing costs like title insurance and the mortgage origination fee. "With that now limited to 3 percent, buyers might have to come up with another 1 percent of the mortgage amount," Anderson says.

Higher up-front mortgage insurance premiums won't affect the amount of cash buyers will need to raise, as that can be financed. But it will affect how much house they can afford, and could increase their monthly payments by $50 to $100. "That extra cost can have a big impact," he says.

Since the FHA commands about 40 percent of the mortgage market nationally and far more that that in regions like the Midwest (with a strong tradition of using FHA-insured loans), Anderson thinks these hurdles are a reasonable price to pay to ensure a healthier FHA.*

*REALTOR, March 2010, Real Life News-Trends-Tools: A Price Worth Paying-Buyers will be pinched by FHA's new rules, by Robert Freedman