Starting this summer, the Federal Housing Administration (FHA) is tightening its lending guidelines as a way to shore up its finances. FHA loans are currently the most popular mortgage loans, because they provide up to 97.5% loan-to-value (LTV). Most "conventional" loans (i.e. non-FHA) can only go to 80% or 90% LTV, making it difficult to borrow for people with good earnings and credit scores, but no savings.
What Will the New Guidelines Be?
FHA is following suit with other lenders in tightening their standards. The announced changes will be:
1. Increased Minimum Credit Score - borrowers will now have to have a minimum of 580 credit score to qualify for the 3.5% downpayment (97.5% LTV). Until now, there was no minimum score required. Those with lower scores will be asked to make a downpayment of at least 10% (90% LTV).
2. Increased Mortgage Insurance Premiums - current premium is 1.75% of the loan amount, prepaid at closing. This will go up to 2.25%, but this extra cost can be rolled into the mortage (increases the loan amount).
3. Reduced Maximum for Seller Concessions - up until now, FHA loan borrowers could get up to 6% of the purchase price in seller concessions (to pay closing cost, points, prepaids, etc.). This will be reduced to 3%, placing FHA in line with most other conventional loans.
4. Quick flipping rule will be suspended for one year. Before February 1st, anyone who bought a home to fix and flip, or just to flip, had to wait a "seasoning period" of 90 days before the second purchaser could finance the purchase with an FHA loan. This rule will be suspended for one year, which will allow investors and rehabbers to buy, fix and quickly re-sell at a profit.