FHA Lending ChangesFeb 21 2013
The Federal Housing Authority provides mortgage insurance for loans made by approved lenders and, having insured more than 34 million mortgages since its inception in 1934, it is the largest mortgage insurer in the world. FHA financing is an attractive option for many borrowers as they require very little down payment – as little as 3.5 percent of the cost of the home. The modest down payment makes buying a home a possibility for those who otherwise might only have the option of renting.
In an effort to strengthen the Federal Housing Administration’s finances, new lending rules are to be rolled out April 1, 2013. According to FHA, the measures will help replenish FHA’s Mutual Mortgage Insurance Fund (MMI) as the MMI has been running in the red.
The changes FHA will institute focus on generating more revenue to replenish the MMI fund in turn offering more security to the program itself.
Currently, owners with more than a 78 percent loan-to-value ratio pay 1.25 percent of the loan amount for insurance, which is included in the monthly mortgage payment. When the new rules go into effect, the insurance will increase to 1.35 percent for loans less than $625,500 and to 1.75 percent for loans of more than $625,500.
Additionally, for those with a loan-to-value ratio between 78 and 90 percent, monthly mortgage insurance is required for 11 years or until the home is sold or paid in full. If the loan-to-value ratio is more than 90 percent, the home owner will pay insurance for the life of the loan, rather than having the insurance cancelled once the owner hits a 78 percent loan-to-value ratio.
While these changes will make FHA an expensive path to homeownership, when you have limited down payment funds and less than stellar credit FHA is still the best option.