For at least a couple of months, I have heard rumblings about changes that were going to be coming to the FHA program that were going to be “scary” and were going to make it “much harder” for people to qualify for an FHA loan.
Earlier this week, HUD issued a press release detailing a few of the upcoming changes to the FHA program – and while it is true that in the future it will make it more expensive for someone to get an FHA loan, my first thoughts after reading it were:
It could have been worse.
Highlights of the changes to the FHA loan program:
- The UFMIP requirements are going up from 1.75% to 2.25%
- For people who have a credit score below 580, the down payment requirements are going up from 3.5% to 10%
- Allowable seller concessions are going down from 6% to 3%
UFMIP Requirements Going Up
When you get an FHA loan, you are required to pay UFMIP (which stands for Up Front Mortgage Insurance Premium) and from time to time, HUD adjusts the amount they require to be paid. In the past, they have actually lowered the amount required to be paid – but due to the fact that FHA isn’t exactly flush with cash at the moment, they are raising the amount required to be paid. There isn’t a way around paying this UFMIP when you get an FHA loan – but the good news is that if you don’t have the cash to pay all of it up front when you get your loan, you can finance the entire amount into your loan.
Low Credit Score = Higher Down Payment
For people who have a credit score that is lower than 580, the new down payment requirement will be 10% rather than the current 3.5%. While this may seem steep if you have a low credit score, the reality is that very few (if any) lenders are still doing FHA loans for people who have lower than a 580 credit score. My guess is that after this goes into effect, virtually no lenders will provide FHA financing for people with a credit score below 620.
Seller Concessions Reduced From 6% to 3%
In my opinion, this change possibly has the biggest impact. Many times when negotiating the price of a home, seller concessions can help the buyer actually be able to afford getting into the house. While it won’t be a deal killer every time, this will make it more expensive for buyers in many cases — and I expect that it will result in higher out-of-pocket costs to buy a home.
FHA loans are still gaining momentum as a financing option for many home buyers and I expect that these changes will not slow that down at all — it will just make it slightly more expensive to get an FHA loan. Which isn’t exactly great news for the housing market in general, but remember:
It could have been worse.