Big Changes Coming for FHA Loans

David_Stevens_FHA_CommissionerThe Federal Housing Administration is tightening rules for lenders after reporting that its financial cushion will sink below mandatory levels for the first time in its 75-year history.

It should be no surprise that most of the first time home buyers in San Diego are using an FHA loan. With low downpayment of 3.5%, higher loan limits, and no HVCC it has become the loan of choice.

First, FHA has announced that its financial cushion will sink below mandatory levels for the first time in its 75 year history according to an article on Yahoo Finance.

“Under no circumstance will any taxpayer bailout be needed,” said David Stevens, the FHA’s commissioner. The agency doesn’t expect to raise fees for borrowers, he said, or curtail the number of loans it insures.

Amid the collapse of the subprime lending market, the government has taken up the slack. The FHA has insured nearly a quarter of all new loans made this year, and about 80 percent of that business is from first-time homebuyers.

But the agency has faced concerns on Capitol Hill that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.

The FHA’s capital cushion will drop below 2 percent of the roughly $675 billion in mortgages insured by the agency this fiscal year, an outside audit has found.

“For too long FHA has not been able to control its losses,” said Sen. Kit Bond, R-Mo.

Plummeting home prices are the main reason the agency’s financial reserves are dwindling. Its previous analysis had assumed prices would hit bottom this year, but the agency is now expecting prices will fall through next spring. Lower prices mean bigger losses if the FHA has to foreclose and re-sell a property.

Secondly there are some upcoming changes in FHA which will effect buyers.  These are outlined on a recent article in the Wall Street Journal.

For refinancings of FHA loans, the agency plans new rules for verifying income and other quality-control checks. It also will impose a maximum loan value of 125% of the current estimated home value on refinanced loans, in line with government-backed mortgage investors Fannie Mae and Freddie Mac.

Appraisals will be valid for no more than four months, down from six to 12 months previously. The FHA also plans to change rules aimed at averting pressure on appraisers, making them more consistent with those adopted earlier this year by Fannie and Freddie. Mortgage brokers or bank employees paid on commission won’t be allowed to order appraisals.

Last, as of October 1, 2009 there will be no spot approvals for condominium or PUD units.  Jim Reppond wrote an excellent article on Rain City Guide regarding those changes.

There are major changes on the way for developers of condo projects and existing condo owners who want to get approved for FHA financing. These changes are set to take place October 1st, 2009. But the ramifications are going to start being felt right away. The details are outlined in the Mortgagee Letter 2009-19 that was issued on June 12th by HUD. In this latest Mortgagee Letter FHA is announcing dramatic changes to their Condo Approval Process and the ELIMINATION of the Spot Approval Process. While these changes reduce the documentation and requirements for Full Condo Approval, it will place a lot more work and responsibility on Lenders.

If you want to know more about an FHA loan visit 5 Advantages of an FHA Loan or a video by Mark Robertson on advantages and disadvantages of an FHA loan.

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