Bleak on the Horizon

Harder to get an Uncle Sam mortgage
Rising defaults on loans insured by the Federal Housing Administration (FHA) have led the agency to impose future policy changes to its home loan program. The FHA provides mortgage insurance on loans made by FHA-approved lenders. Borrowers must meet certain requirements established by the FHA to qualify for the insurance, but lenders bear less risk because the FHA will pay the lender if a homeowner defaults on his or her loan.

MAKING SENSE OF THE STORY FOR CONSUMERS

• The FHA is federally mandated to maintain reserve funds at 2 percent or greater. As of November, the agency reported that its fund had declined to .53 percent. The funding is used to cover losses on mortgages insured by the FHA that go into default.
  
  
• Loans insured by the FHA generally are less expensive to borrowers because of the lower down payment requirements. However, these loans also have fees, such as up-front mortgage insurance. To help the agency raise its cash reserves, the FHA is increasing the up-front mortgage insurance premium from its current 1.75 percent to 2.25 percent. HUD released a Mortgagee Letter today making the premium increase effective in the spring.
  
  
• The agency also is raising the minimum credit score requirements. Currently, borrowers with FICO scores as low as 500 have been approved for FHA-insured loans. Under the policy changes, new borrowers will be required to have a minimum FICO score of 580 to qualify for the FHA’s 3.5 percent down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10 percent. FHA expects this to take effect in early summer once it passes the normal regulatory process.
  
  
• The new policy also will reduce the amount of money sellers can provide to home buyers at closing to 3 percent, down from its current 6 percent, of the home’s price. The change brings the agency in line with industry standards and removes the incentive to inflate appraisals. The FHA expects this to take effect in early summer after it passes the normal regulatory process.

Foreclosure website and how home owners can cut spending

Talking Points
Here’s what's new...

• The U.S. Dept. of Housing and Urban Development (HUD) offers an online guide to preventing foreclosure. The guide provides consumers with information such as how to contact a housing counselor; when and how to talk to their lender; how to find foreclosure resources; tips on avoiding foreclosure and foreclosure scams, as well as information for consumers who cannot keep their home. The guide to preventing foreclosure is available at http://www.hud.gov/foreclosure/.
  
  
• In today’s economy, many homeowners are looking for ways to reduce spending. One way to do so is by reviewing their homeowner’s insurance policy. Raising the deductible from $500 to $1,000, reducing coverage on the “household contents” portion of the policy, and installing home security devices could save as much as 25 percent every month on premiums, according to the Insurance Information Institute.