Loan Information

Why are FHA loans so popular?

Why is FHA so popular today?

Credit score: FHA has always been a friend to the borrower with bruised credit. But up until roughly 1999 credit scores were not that integrated into the mortgage lending process. And FHA lenders were still manually underwriting loan files up intil the past few years.  FHA does not have a minimum credit score written into its guidelines, but it has allowed lenders to set their own minimum scores and some lenders are using the threshold in the range of 620 to 640 minimum score for FHA

Down payment: FHA currently has a minimum down payment amount of just 3.50% of the sale price. For a home in Vienna, Virginia selling for $700,000 this equates to a $24,500 down payment. Compared that to coming up with  $35,000 or $70,000 for a conventional loan.  But lets be more realistic with a sales price of say $350,000 the FHA down payment would be $12,250 verse a $17,500 or $35,000 for a conventional loan.

Seller concessions. Closing costs are still one of the biggest obstacles when getting a home loan. FHA allows 6% seller concessions where by conventional concessions typically stop at 3% of the sales price.  A seller concession is money the seller gives (negotiated) the buyer to pay all or part of the buyers closing costs.  There is talk that the 6% is to high and should be lowered to 2% of the sales price. Closing costs in Alexandria, Virginia are about 2.50%-3.50% of the sales price. This obviously depends on the rate and point structure of the loan.

Mortgage insurance: FHA has two mortgage insurance charges: Up Front Mortgage Insurance (added to the loan amount) and annual premium charge based on the down payment amount. The upfront mortgage insurance premium (UFMIP) is 1.75% of the loan amount. This fee can be financed or paid out of pocket by the borrower at closing.  Most borrowers tend to finance the UPMIP by rolling the fee into their loan amount. FHA also charges an annual premium, paid in monthly installments, depending on the down payment 3.50% is .55% and 5% or larger down payment is .50%.  

Possible problems with the FHA program?

Having originated FHA loans all over northern Virginia for over 15 years I have never read anything about FHA being in trouble…until now.

Basically what’s going on right now is that there are justifiable rumors that the FHA’s reserves (capital) are hovering around dangerously low levels.

Congress has mandated FHA capital reserves to be 2%, at the moment the reserves have been speculated to be around .53% which is down from 6.5% in 2007. FHA reserves are consumed when FHA mortgages are defaulted on.

Some thoughts on the street to rebuild reserves, FHA could play with one or both premiums to increase their revenue. Let’s face it, one person’s tax or charge is another person’s income or revenue.  FHA could raise the upfront premium to as high as a maximum of 2.25%. It could also raise the annual fee, but the total premium could not exceed 3% under current congressional limits. The UPMIP has been over 3.00% before but I doubt it would go that high again. The outcry from NAR and MBA would be huge.