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Game Changes in FHA Lending

Start with this – what exactly is “Housing and Urban Development?”

“HUD is the nation’s housing agency committed to sustaining homeownership; creating affordable housing opportunities for low-income Americans; and supporting the homeless, elderly, people with disabilities and people living with AIDS. The Department also promotes economic and community development and enforces the nation’s fair housing laws. More information about HUD and its programs is available on the Internet at and”

HUD issued some game changing guidelines recently for the underwriting of FHA loans, and the purpose of this article is to help you understand what this means for 2010 buyers and sellers of residential real estate.


Lets start with one of the simple game changes.

-  As of April 5th, 2010 FHA loan funded buyers need to change from 1.75% to 2.25% for their “FHA up front funding fee” on their contracts

What does this mean?

-  For every $100,000 in loan amount, it costs a buyer $500 more, up front

-  If  a buyer decides to roll this amount into their FHA loan, then it costs the buyer a little less than $3 dollars per month

OK, that’s fairly simple and easy to understand – since FHA is in federal receivership, they need to make a little extra money and we expect that they will shore up their financial status over the coming years…yeah, right…

What are the underlying reasons for this change and any other changes? How will this make a long term impact?

What will this mean when my daughter is ready for her first house?


I believe that it means that she better hope she’s a cash buyer in 2035 – cash will still be king!

FHA Announces Policy Changes to Address Risk and Strengthen Finances

New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities


WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities….

The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement…

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens….”

Here are the announced FHA Policy Changes:

Mortgage insurance premium (MIP) will be increased to build up capital reserves and bring back private lending

    • The first step will be to raise the up-front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge.
    • If this authority is granted, then the second step will be to shift some of the premium increase from the up-front MIP to the annual MIP.
    • This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
    • The initial up-front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.

Update the combination of FICO scores and down payments for new borrowers.

    • New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
    • This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
    • This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.

Reduce allowable seller concessions from 6% to 3%

  • The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
  • This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

Increase enforcement on FHA lenders…

  • Publicly report lender performance rankings to complement currently available Neighborhood Watch data – Will be available on the HUD website on February 1.
    • This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.
  • Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
    • Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
    • This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
  • Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
    • Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
  • HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
    • Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders.This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
    • Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches

In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions via the HAFA and HAMP programs.

This is a lot to swallow for a person seeking an FHA mortgage, but remember this if you remember anything from this article:

1. get your FHA loan application in now, before April 5, even if you are not rushing to buy for tax credit purposes

2. if you fail to get going by April 5, then get your FHA loan application before the end of May – “early Summer” will make things more difficult for buyers who seek seller paid closing costs

3. call me if I can help you identify a solid FHA lender

If you are a seller, then you need to scrutinize the FHA buyer before you even consider the “contract” or “offer” they present. Scrutinize their lender, their timing and the structure of their loan.


Game changes are OK – money got funny, and now capital is doing the tighten up!


  1. The availability of payment protection insurance to safeguard the borrower is a better option in case the borrower is not assured of the future payments. Though this is an extra baggage on the borrower, it’s better than having the bank auction your property.

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