Rumors have been swirling around that FHA will be the next big thing to go under in the Lending industry.   Why?  Well an FHA loan is simply a mortgage that is insured by HUD against default, to protect the lender.  FHA's reserve funds are dwindling as the default rates on FHA loans are increasing.  If HUD were to run out of money to insure these loans, then FHA would be no more!

As HUD Secretary Shaun Donvoan said yesterday before the House Committee on Financial services, this is unlikely to happen.  However, HUD must make some changes in order to keep things humming along.

Nothing is set in stone yet, but HUD has suggested some changes that are likely to be implemented in 2010.  Here are some highlights of proposed changes:

• Increased Down Payment - Currently an FHA buyer must contribute a minimum down payment of 5%.  HUD has made it very clear they want FHA buyers to have more "skin in the game".  And to do this they want to increase the cash required from buyers.  How they will do this is still not clear, it may be an increase in the down payment to 5% or a combination of down payment and closing costs to equal a minimum of 5%; either way buyers will need more money to buy.
• Seller Conessions to be lowered- Currently a Seller may contribute up to 6% of the sales price to pay closing costs, pre-paids or points for the buyer.  HUD is considering lowering this to 3% which is the current maximum for Fannie Mae conventional loans.  In days of past, 3% would pretty much cover all the costs for the buyer.  However, with prices increasing everwhere, including lending, this doesn't cover all the costs for a lot of buyers.  Depending upon the price of the home, the Seller may not be able to cover all the costs.
• MIP Premiums to Increase- Private mortgage companies insure the loan for the lender for a monthly fee that is paid by buyers who have less than 20% down.  FHA has a similar monthly fee, however, it can be as much as 40% less than a conventional premium depending upon the buyer's situation.  FHA also has an Up Front Mortgage Insurance Premium that is charged at the time the loan closes and is added to the loan amount.  This up front premium, along with the monthly premium,  is what is used to replenish HUD's insurance pool so that they can insure against defaults.  Currently, FHA collects 1.75% of the loan amount as the Up Front MIP and then charges an additional .55% of the loan amount annually, as part of the monthly mortgage payment.  HUD did not announce what they will increase or how much but I speculate they will increase the Up Front MIP and keep the montly premium the same. 
• Increase minimum FICO scores-This is almost a mute point and I will explain.  Currently FHA does not have a minimum credit score to qualify for an FHA loan.  However, nearly all lenders have imposed their own minimum credit scores usually ranging from 620-640; some as high as 680.  HUD is now  considering implementing a minimum credit score.  No word on what that will be but my guess is it will be in the 620-640 range.

We have seen changes in almost every facet of lending, and HUD appears to be following suit.  FHA financing will become more costly and more difficult in the future.  There are plenty of  reasons that scream "buy now" - historically low rates, tax credit and housing prices - this is just another reason to get out and act now!

Please feel free to call me if you have any questions regarding purchasing or financing a home.