Some of the major players in the mortgage market continue to tweak their loan programs, both to reduce risk in their portfolios and to cure their shattered financial condition.
The Federal Housing Administration in particular has been scrambling to shore up its finances while still trying to provide loans to as many people as possible by designing an aggressive risk reduction program. While most FHA changes have affected lenders, there have been recent modifications in FHA programs that also affect borrowers.
In April the FHA raised the upfront premium for its insurance from 1.75 percent of the loan amount to 2.25 percent. This will increase the amount of cash the borrower must bring to the table, although the premium can be rolled into the loan. It is expected to be a temporary increase.
In addition, Congress passed legislation in August that raised the ceiling on annual FHA premiums from 0.5 percent of the outstanding balance to 1.55 percent. While FHA has said premiums will not hit the new ceiling, it does expect to shift some of the upfront premium increase into that fee, spreading it out in more manageable chunks.
Current low interest rates are cushioning the effect of the increase in premiums, said Christopher Gardner, president of FHA Pros, which advises condo associations seeking FHA approval. This is especially true since the increase can be financed.
“Even if monthly fees increase,” he said, “FHA has so many advantages and will still be a smidgen less expensive than a traditional loan.” That FHA loans can be assumed by a new owner, he added, is like gold when it is time to sell.
FHA also has raised the minimum FICO score for its popular 3.5 percent down payment program to 580, and the minimum for all FHA-insured mortgages to 500. This, however, will not affect many borrowers as most approved lenders have long required higher scores than the new benchmarks.
Another change, and one that has gotten the most attention, is the reduction in allowed seller concessions. In the past, a buyer could negotiate concessions up to 6 percent of the price of the home. The high-concession loans have been found more vulnerable to default, so concessions are now limited to 3 percent. A seller can make larger concessions, but the excess must be deducted from the loan.
The concession change is also unlikely to have much effect, said Michael “Mick” Poe, an agent with Re/Max Allegiance Real Estate in Burke. “Just because you can do something,” he said, “doesn’t mean you will. In the real world, we rarely saw concessions as large as 6 percent. The number of buyers this will affect will be negligible.”
Gardner noted some recent changes primarily aimed at lenders actually may have the biggest influence on borrowers. Under the financial reform legislation enacted last month, lenders will be required to retain ownership of 5 percent of each loan when it is sold on the secondary market.
This so-called “skin-in-the-game” provision, however, does not apply to FHA loans. Gardner sees lenders increasingly steering borrowers toward FHA so they can cash their investment out completely.
