HUD Keeps FHA Changes Small - Perserves a Great Program

The FHA loan program has been a boon to buyers of all types, from first timers on up. It has been a staple in the current market allowing for small down payments, gift money for the down, lower credit scores and not requiring much money in the bank.

Not long ago it was announced that HUD was tightening up guidelines for the FHA product and they discussed increasing the insurance payment, the down payment, raising credit score requirements and increasing the monthly MI cost to the borrower. This was all because the FHA program has become the defacto sub-prime loan in the industry and HUD was losing lots o’ money in the current economic melt-down.

Well this was big news to all of us and pretty scary since much of the loan activity in the past couple of years have been through FHA. The changes that HUD was hinting at could have been devastating.

The good news is that while HUD did increase the up- front MI premium, from 1.75% to 2.25%, they have decided to leave the rest alone. This is HUGE!

Probably the biggest piece is their decision not to increase the down payment. Currently it is 3.5% and they were thinking of going to 5% and maybe even 10%. That would have taken many potential customers right out of the market. The original logic was to have the clients have more skin in the game but increasing the down wasn’t really going to help minimize losses. Simply put, most of HUD’s losses have been because borrowers have lost jobs, not because they didn’t put an additional 1.5% in their down payment.

By increasing the up-front MI premium by .5% they will be collecting significant amounts of money to use to hedge against future losses. This is a MAJOR benefit to them and it really doesn’t hurt the client much since this premium is financed into the loan balance. With it financed in, the trickledown effect comes out in the borrower’s monthly payment and typically we’re talking about a very small increase, usually around $10.00 to $20.00.

In the midst of a time when virtually everything that comes out of government, related to our industry, leaves your head spinning at the absurdity, finally a sensible and well placed set of decisions that will help rather than hurt.