Upcoming Changes for FHA in 2013

On December 18, 2012, FHA announced additional changes to its loan program. An independent actuarial audit of FHA showed the economic value of the Fund is negative $13.48 billion.  As a result, FHA needs an additional $13.48 billion to carry a full 30-years' worth of reserves on its mortgage insurance portfolio. The changes are an effort to rebuild the reserves of the Mutual Mortgage Insurance Fund, which are needed to fund failed loans. Among several changes, the annual mortgage insurance premium (MIP) shall be increased from 1.25% to 1.35%.  The amount of the increase is approximately $10 per month on a $100,000 loan. The most significant change is the lifetime requirement of mortgage insurance. Under the current loan program, borrowers are allowed to cancel the mortgage insurance premium when their unpaid balance reaches 78% of the original purchase price. However, the new FHA loans will require the mortgage insurance for the life of the loan. In addition, FHA will increase the down payment requirement to 5% for loans above $625,000. They also revealed there will be greater oversight on borrowers who are trying to obtain a new FHA loan 3 years following a foreclosure. As a final point, the debt to income ratio (DTI) will be raised to a maximum 43% DTI for borrowers who have a credit score below 620. While no specific date has been set for the revisions, we are certain they will be implemented in 2013. If you are considering a purchase or refinance utilizing the FHA loan program, I urge you to make the decision prior to the implementation of the new rules. By doing so, you will avoid the MIP rate increase and elude the lifetime mortgage insurance requirement. Although we will likely not hear about these changes in the media, these changes will have a tremendous impact on the FHA borrowers.