With the high amount of defaults FHA is experiencing through foreclosed homes and short sales, FHA has decided to follow the path of FNMA and tighten it's guidelines. Here are the upcoming changes that take effect in the next few months:
1. Increased mortgage insurance. The mortgage insurance premium will be increased from 1.75% to 2.25%. Although this is an increase it will only affect the monthly payments slightly.
2. New down payment and credit score requirements. According to the new policy you will have to have a 580 credit score or higher to keep your down payment at 3.5%. All scores lower than 580 will require a down payment of 10%. This actually has little affect on buyers since almost all banks require a 620 plus credit score to buy a home with FHA financing.
3. Reduced seller concessions. The Seller of the home will only be able to contribute 3% to seller closing costs instead of the allowed 6%. Typically closing costs are around 3% but in markets such as Arizona where homes are selling for as low as 70-80k and lower, 3% of a sales price will not be enough to cover all the closing costs.
The changes will become effective on April 5, 2010. A borrower will need to have an FHA case number on their property prior to that date to avoid the changes.