FHA Home Loans: Changes You Need To Know About

FHA loans, introduced during the Great Depression, are a type of federal assistance and have historically enabled lower income Americans to borrow money for a home that they otherwise would not be able to afford. Now, FHA primarily serves people who do not have the cash for a down payment on a conventional loan. (FHA requires only a 3.5 percent down-payment for borrowers who meet the credit criteria.) It also appeals to folks with a few dings on their credit history as it is more forgiving of bankruptcy and foreclosure than conventional mortgage programs.

 In 2012 year to date, FHA loans account for 17 percent of all home purchases in Alexandria. 

Anyone considering a home purchase (or sale) should be aware of several changes to FHA loan requirements. Many changes are now in effect and more are scheduled to take effect soon. These important changes in FHA rules affect not only the cost of FHA financing, but also how an FHA loan can be applied for and approved.

“It’s going to make fewer people qualify” for the loans, said Michael Moskowitz, the president of Equity Now in New York. “It’s the equivalent of a quarter-point increase in interest.” 

 In its announcement, the FHA said the upfront PMI will increase from 1 percent of the loan amount to 1.75 percent of the loan amount. In addition, its annual mortgage insurance premium will increase by 0.10 of a percentage point for loans under $625,500, which would now cost 1.25 percent of the loan amount, up from 1.15 percent. The increase will amount to an extra $500 for every $100,000 borrowed. For comparison purposes, if a borrower purchasers a $650,000 home, the PMI increase will amount to an additional $191 per month in annual PMI alone.

There have been many recent proposals to change the limit for seller concessions on an FHA insured loan. Currently, a seller concession of 6 percent is still allowed.  The Federal Housing Administration is revising last year’s proposal for limiting seller concessions related to single-family residential mortgages it insures and is accepting comments from the public until March 26. To read more about the proposed changes, see the Federal Register.

Finally, the most important change for sellers and buyers to understand is the higher loan limit. New FHA loan limits are in some cases higher than the loan limits set by Fannie Mae and Freddie Mac. The FHA publishes a list of the loan limits to help borrowers understand how much potential borrowing power they may have in their area, assuming that they qualify for the loan.

For calendar year 2012, the maximum FHA loan remains at $729,750 in the highest cost cities and counties of the contiguous U.S and this includes most counties in Northern Virginia. Conventional loans, or jumbo loans, have a limit of $625,500.

Although the increase takes effect April 9, home buyers who are currently under contract can have a case number assigned to have the previous PMI rate applied.  Borrowers with any questions can call the FHA assistance center at 1-800-CALLFHA.

Here is a great video with the details.