Upcoming Changes to FHA Mortgages

In a recent press release, HUD has announced several changes coming soon to FHA mortgages. FHA mortgages are popular with home buyers because they allow for lower down payments (currently as low as 3.5%) and FHA mortgages tend to be more flexible with credit scoring and debt-to-income ratios. Another reason why home buyers may lean towards is an FHA mortgage in the greater Seattle area is because the allowed loan amount for a single family dwelling is $567,500 compared to $506,000 with a conforming mortgage.

Upcoming changes to FHA mortgages include:

  • FHA annual mortgage insurance (paid in the monthly mortgage payment) will increase by 10 basis points on FHA loans. FHA jumbos (loan amounts of $417,001 to $567,500 in King County) will see an increase of 5 basis points. This is effective with case numbers issued April 1, 2013 and later. 
  • FHA mortgage insurance to be permanent.  FHA mortgage insurance on loans with case numbers issued April 1, 2013 or later will have mortgage insurance on the life of the loan. FHA mortgage insurance on loans with case numbers issued prior to June 3, 2013 will still have their mortgage insurance terminate once it meets 78% loan to value and 60 payments have been made.
  • FHA annual mortgage insurance on 15 year amortized mortgages to be 45 basis points effective with case numbers issued June 3, 2013 and later.  Currently FHA mortgages with 15 year terms do not have annual mortgage insurance.
  • Manual underwriting for borrowers with credit scores below 620 and debt to income ratios exceeding 43%. This basically means that even if the automated underwriting system issues an approval – a borrower meeting this criteria will still need to have a human underwriter review the complete application and decide if she wants to sign their name to it.  I believe at our company, our lowest credit score we will accept for an FHA loan is 640.  This goes into effect with case numbers issued April 1, 2013 and later.
  • Minimum down payment to increase on FHA Jumbo mortgages to 5%.  Currently FHA jumbos have a minimum down payment requirement of 3.5%. In King, Snohomish and Pierce Counties, FHA loan amounts between $417,001 and $567,500 are considered to be FHA Jumbo. A mortgagee letter has not been issued yet (as of the publishing of this post) as to when this will happen.

The increases to FHA annual mortgage insurance premiums will not impact FHA streamlined refinances IF the existing underlying FHA mortgage was endorsed by HUD prior to June 1, 2009.   These lucky home owners still qualify for reduced FHA mortgage insurance premiums.

These changes are in effort to help bolster FHA’s capital reserves.  From HUD’s press release:

“These are essential and appropriate measures to manage and protect FHA’s single-family insurance programs” said Galante.  “In addition to protecting the MMI Fund, these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

If you have been considering buying or refinancing using an FHA insured mortgage and have the ability to beat the April 1, 2013 date when many of the changes are taking place, I encourage you to do so!  FHA case numbers are issued after a bona fide application is in place. If you are in an FHA transaction during the April 1 date, you will want to confirm with your mortgage professional that you have an FHA case number.


This entry was posted in FHA, Investing and tagged , , , by Rhonda Porter. Bookmark the permalink.

About Rhonda Porter

Rhonda Porter is an NMLS Licensed Mortgage Originator MLO121324 for homes located in Washington state. Her blog, The Mortgage Porter, is nationally recognized for sharing relevant information to consumers about mortgages. She has been originating mortgages since 2000 at Mortgage Master Service Corporation #40445 Consumer NMLS Website: http://www.nmlsconsumeraccess.org/TuringTestPage.aspx?ReturnUrl=/EntityDetails.aspx/COMPANY/40445 NMLS ID 40445. Equal Housing Opportunity. You can follow Rhonda on @mortgageporter, Facebook and/or Google+

19 thoughts on “Upcoming Changes to FHA Mortgages

  1. Thank you, Rhonda! Love the manual underwriting requirement.

    Mortgage Insurance for the life of the loan is interesting, and pretty much a first I think for any type of mortgage. I’m wondering if MI being tax deductible for the life of the loan will go hand in hand with this new, and somewhat startling, change.

    • “Human” underwriters still review and approve automated underwriting responses – however with the manual underwrite, the human who signs off on the loan has more to risk…he or she cannot blame “well AUS approved it”. I think this will make it more difficult for borrowers with credit scores and dti’s that fit that criteria.

      I think the mortgage insurance for the life of the loan is interesting too… I believe USDA mortgages already have this feature. This has been a turn off for some borrowers – and the reality is that most of them will not keep a mortgage full term.

      I’d like to see FHA have more of a risked based pricing with the mortgage insurance premiums. Borrowers with 740 credit scores should have a different premium than those with a 640. The only difference FHA sets currently with determining the amount the mortgage insurance premium is 3.5% or 5% down payment and the loan term (15 or 30 years).

  2. Thanks Rhonda. I think I just have a bias for human underwriters. 🙂 I have heard BECU offers a 3% down. Not sure what the restrictions are. Seems to me that while these things are meant to strengthen FHA resources, it will likely cause all but the weakest buyers to use non-government insured loans. Not necessarily a bad thing.

    It won’t be easy to track the long term impact, given the popularity of FHA does not currently have a 10 year history since zero down conventional went away and the market resumed its course.

    • I do too, Ardell 🙂 We probably would have not suffered nearly as much with the mortgage meltdown had human underwriters been allowed to be more involved. Everything is so automated with credit scoring and underwriting and although it allows for speed and efficiency to the mortgage process, it has it’s drawbacks.

      Fannie Mae also has a 3% down program with Fannie Mae Homepath – the only catch is that it’s limited to homes that are designated to be in the Homepath program – Fannie Mae foreclosures. It looks like this might be the 3% down payment BECU has – we have it too! 🙂

  3. Can a highly qualified buyer, say 740+ credit score and very low ratios, still do a 5% down conventional on a less than $417,000 loan?

    I have a client who may buy a $350,000 or so house for now, but wanting to conserve their cash in case “the right house” comes along. They will then keep the lower priced one as a rental long term. They will live in it instead of renting, pretty much indefinitely, until and unless their perfect long term house is attainable.

    Is MI still tax deductible in 2013 and still on an “annual approval” basis?

    • Hi Ardell,
      Your client should really look at conventional with 5% down over FHA. Their mortgage payment will probably be dramatically lower as FHA has both upfront and monthly mortgage insurance. Borrowers don’t need 740 credit scores to qualify for pmi and conventional financing with 5% down.

      Mortgage insurance is tax deductible through 2013 and phased out to those who have higher income levels.

  4. This is going to change things significantly. It means an added cost to the payments for the life of the loan if the insurance is not removed. Borrowers need to be aware of this before they agree to the loan.

    Having human underwriters, in my opinion, should always factor into a loan. The only flip side to this issue is that minorities with low credit scores statistically receive more discrimination and loan rejections. I foresee this as an issue down the road.

    • Simon, with a minimum down FHA mortgage, it would take most buyers about 10 or more years before the monthly mortgage insurance drops off. And I do agree that consumers should check out all possible options before deciding on a loan program.

      • Not necessarily when you factor in market appreciation. If the buyer bought a bank foreclosure at the market bottom, remodeled the property and is in an area where values are increasing, the 21% equity position could come much more rapidly. This is usually verified by comparing the original appraised value with a new one completed by a licensed appraiser.

        • Current FHA guidelines have a minimum of 60 monthly payments required before the MI will drop off regardless of how much appreciation is happening in the market. The only way to remove the mi in that case (that quickly) would be to refi to a conventional mortgage.

    • I guess we have to take the good with the bad. The Mortgage insurance for the life of the loan is definitely a negative but, the manual underwriting is something that will help many buyers.

      For me personally though I wouldn’t want an FHA loan with mortgage insurance for the life of the loan. So, it will be interesting how potential borrowers react.

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  7. Well thats more of a negative for me, im looking at investing i my second property and that seems like a downfall

  8. A great alternative to an FHA loan is a 5% down conventional loan. There is no upfront mortgage insurance like an FHA loan and the monthly mortgage insurance premiums are considerably lower.

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