The Federal Housing Administration (FHA) has announced plans to increase the amount of up-front cash paid by new borrowers and to require higher down payments from those with the poorest credit.

A Little History

Prior to 1983 FHA loans required the borrower to pay an annual mortgage insurance premium (MIP) of 0.50% of the principal balance per year. In 1983 President Reagan initiated an additional premium known as Up Front MIP (UFMIP), paid in a lump sum at closing. The premium equals 2.25% of the loan amount and is due at closing.  The premium could be financed into the loan. On January 1, 2001 the UFMIP was reduced to 1.50%. On October 1, 2008 the UFMIP was raised to 1.75% for purchase transactions.

FHA regulations required the borrower to invest 3% of the sales price which included a minimum 2.25% down payment. The seller was allowed to contribute up to 6% of sales price towards the borrowers settlement costs.

Fast Forward to Today

Effective January 1, 2009 the down payment requirement was raised to 3.5%.

The new policy changes would increase the UFMIP from the current 1.75% to 2.25% of the loan amount. Borrowers with a credit score of less than 580 will have to make a down payment of at least 10%. (note: It should be noted that the policy of most lenders is to require at least a 620 credit score to be approved for an FHA loan.) Under the proposal the amount the seller can contribute to the borrowers closing costs will be reduced from 6% to 3%.

The new polices are expected to be implemented starting this spring.

Before the “subprime crises” FHA’s loan volume had fallen substantially. FHA current backs 30 percent of all loans for home purchases and 20 percent of refinanced loans.

For more information go to the FHA Press Release

Thanks to Alan Gross of Prime Lending for providing this timely information

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