FHA Commissioner David Stevens announced a set of policy changes last week for FHA mortgages. FHA will propose to take the following steps:

1. Increase the mortgage insurance premium (MIP)
2. Update the combination of credit scores and down payments for new borrowers
3. Reduce seller concessions to 3 percent, from 6 percent
4. Implement a series of significant measures aimed at increasing lender enforcement and accountability

Announced FHA Policy Changes:

1. Mortgage insurance premium (MIP) will be increased
In an effort to build up capital reserves and bring back private lending MIP is being increased. The first step will be to raise the up-front MIP from 1.75% of the mortgage amount to 2.25% and request legislative authority to increase the maximum annual (monthly) MIP FHA can charge. If this authority is granted, the second step will be to shift some of the premium increase from the up-front MIP to the annual (monthly) MIP. This will take effect this spring.

2. Update the combination of credit scores and down payments for new borrowers
New borrowers will now be required to have a minimum credit score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 score will be required to put down at least 10%. This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in early summer.

3. Reduce allowable seller concessions from 6% to 3%
The current level exposes FHA to excess risk by creating incentives to inflate appraised home value. This change will bring FHA into conformity with mortgage industry standards on seller concessions. This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.

4. Increase lender enforcement and accountability
• Increase enforcement on FHA lenders
Publicly report lender performance rankings to complement currently available Neighborhood Watch data - will be available on the HUD website on February 1. This is an operational change to make information more user-friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available.

• Enhance monitoring of lender performance and compliance with FHA guidelines and standards
Implement Credit Watch termination through lender underwriting ID in addition to originating ID. This change is effective immediately.

• More lender accountability with the risk of losing their ability to offer FHA loans
Legislative authority permitting HUD maximum flexibility to establish separate “areas” for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting and lending approval for a lender nationwide on the basis of the performance of its regional branches.

The mortgage industry has many changes both now and on the horizon. Feel free to schedule a time to talk with me about these changes. I will explain exaclty what you need to know to when purchasing a home.