Changes to loans for first time home buyers

The most common first time home buyer loan program has become the FHA 30 Year Fixed in the past year or so.

In a statement issued yesterday, the Federal Housing Authority is changing the home loan approval guidelines and FHA loans will get a little more expensive.

In total, this is designed to reduce the overall risk of their portfolio and strengthen their overall financials.

For first time home buyers, the changes mean higher costs.

There are 3 major guideline updates for the FHA as listed in the official announcement:

1. Upfront mortgage insurance premiums are increasing to 2.25% from 1.75%
2. Minimum downpayments for applicants with sub-580 FICOs are rising to 10 percent
3. Seller concessions are being limited to 3%, down from today’s allowable 6%

Additionally, the FHA has appealed to Congress to raise an FHA borrowers’ monthly mortgage insurance premiums.

They are clearly trying to balance two competing objectives:  First, provide affordable loans to people that need it and, second, manage the risk that comes with insuring lesser-quality loans.

The most appealing change is the inclusion of a “termination clause” to remove the lenders who create a disproportionate amount of the bad loans.   That will help create a better overall loan pool (the good), but also mean that many lenders will have FHA home loan approval guidelines that exceed the minimum standards.  An example of this is that the FHA will buy a 580 FICO loan, but most lenders are requiring a 620 FICO or higher.

The new guidelines don’t go into effect until spring.  So, between now and then, the old guidelines and lower MIP charges will apply.