Since its inception in 1935, the Federal Housing Administration, or FHA, as it is commonly called, was intended to provide affordable loan programs to homebuyers. These consumers were mainly underserved American families. FHA was created by President Roosevelt. During tough times or otherwise, FHA has always been considered a good financing option for consumers during tough times, especially, FHA historically has been good for Americans and good for our mortgage markets in the USA. Earlier this week HUD Secretary Shaun Donovan testified before the US House of Representatives Committee on Financial Services. He explained how FHA has helped the housing market and the US economy begin recovery. This year alone, more than 75% of FHA’s purchase loans have been first time homebuyers. FHA, he testified, is the leader in helping minorities purchase homes. FHA has always been consumer friendly. For example, in the past, credit scores were not important. The agency was very flexible with a borrower’s credit history. Up until the fall of 2008, down payment could even be financed rendering a borrower’s cash out of pocket to virtually zero in many cases. Based on Secretary Donovan’s testimony, it appears several changes are in the works for FHA. Regrettably, these expected changes won’t be very homebuyer friendly. This is my opinion after 21 years of originating home loans.

At some point in the near future, FHA is expected to reduce the amount of money a seller may contribute to a transaction from 6% to 3%. This means many homebuyers in lower price ranges will not only need a down payment but also will have to pay a significant amount of their transactional costs. So, a homebuyer’s cash investment is going to increase. The current 3.5% down payment is expected to increase, though just how much is not known as yet. FHA is also considering increasing the up front mortgage insurance premium which currently is at 1.75%. By doing so, HUD raises capital in order to protect against future uncertainty in the market. Finally, an increase in minimum credit scores is almost certain. Currently most lenders require a borrower to have a middle score of 620. Before long, that score is most likely going to be 640. So, it appears FHA loans will not go away but will become more stringent for a homebuyer. Good news and bad news.

The wisest and best action for a prospective homebuyer is to prepare properly for buying a home, and that means safeguarding credit and saving money.

Post courtesy of Rena Rogers with Pine State Mortgage Corp.

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