Loan Modification

House Financial Services Committee Approves Plan for FHA

By Karen Lawson

Shrinking FHA capital reserves were  recently addressed by the House Financial Services Committee; Representatives were faced with balancing the FHA’s significant role in providing mortgage loans for first time and moderate income homebuyers with the need to increase the agency’s reserves to legally mandated levels.  FHA reserves have fallen to approximately .53%  of the value of FHA insured mortgage loans, well below the legally mandated level of 2%.

FHA Balancing Act Becomes Treacherous as Reserves Dwindle

In a measure designed to raise FHA reserves while minimizing the impact on borrowers of FHA home loans, the Committee approved allowing FHA to  raise  the annual mortgage insurance premium from its current level of .55%. This move is designed to move some of the cost of mortgage insurance from the up-front mortgage insurance premium (UFMIP)  paid at closing to the annual portion of the premium, which is pro-rated monthly and added to monthly mortgage payments.

I’m relieved that proposals for raising the minimum FHA down payment amount from 3.5% to 5% and eliminating seller contributions to buyer closing costs were defeated by the Committee. These proposals may have been well intentioned toward raising FHA reserves, but would have created hardships for the first time and moderate income borrowers depending on FHA mortgage loans for financing and refinancing their homes.

Of ongoing concern is FHA’s plan for “gradually” raising the annual mortgage insurance premiums from their current rate of .55% to 1.5%. Although the bite out of borrowers budgets may not seem as evident when spread over monthly mortgage payments, another reason for raising mortgage payments seems counterintuitive in view of current unemployment rates and economic concerns. We’ll have to wait and see if this proposal is approved, and if so, how FHA will implement it.

FHA Loans: The Link Between Renting and Buying for Many

Although FHA doesn’t directly lend money for mortgage loans, it guarantees its approved lenders against losses stemming from defaults on mortgages approved under FHA  guidelines; its lending programs  assist first time, credit challenged, and moderate income buyers.

Lower down payment requirements: FHA loans require a minimum down payment of 3.5%, while conventional mortgage loans require 10 to 20% down.

Flexible and alternative credit: FHA guidelines do not require a specific credit score for loan approval, although borrowers with FICO credit scores of less than 580 may soon be required to put 10% down.  Borrowers with little or no established credit can present utility receipts and proof of on-time rental payments for gaining credit approval.

Foreclosure avoidance: Borrowers experiencing financial hardship can contact HUD approved housing counselors  and work with their FHA lenders toward avoiding foreclosure.

FHA loans are  assumable: This means that when you sell your home, buyers qualified according to FHA requirements can take over your mortgage loan. This is an attractive benefit if mortgage rates are higher than your existing FHA loan at the time you’re selling your home.

FHA lending programs provide an important service to buyers, homeowners, and housing markets. Although FHA must rebuild its depleted reserves, it cannot lose sight of how raising costs charged to borrowers and potentially increasing down payment requirements can negatively impact families, communities ,and housing markets.

Full post as published by FHA Mortgage Guide on May 06, 2010 (boomark / email).