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Sweeping Changes from HUD on FHA loans…Really?

Today HUD announced some sweeping changes for FHA loans.  I use the descriptor sweeping because the media and even HUD are portraying these changes as sweeping.  Truth be told, most of these changes either have already been made at the origination level or are a reverting to old standards that have been set for previous FHA loans.  Let’s take a moment to review them:

  • Increasing the upfront MIP (mortgage insurance premium) from 1.75 percent to 2.25 percent (with Congressional approval)
  • Raising the minimum credit score from 500 to 580
  • Reducing the allowable third-party concessions from 6 percent to 3 percent

Now let’s look at these changes individually:

Increasing the upfront MIP to 2.25 percent. The upfront MIP is a one-time fee charged to the borrower at closing.  This fee can either be brought to the table in the form of cash-to-close or rolled into the base loan amount and financed over the term of the mortgage.  These monies go to HUD’s reserve account to help mitigate delinquencies and defaults.  Since borrowers have the option of rolling this fee into the loan, which does not affect their cash-to-close, I do not see any negative impact on demand.  (As a side note, HUD had the same MIP years ago.)

Raising the minimum credit score from 500 to 580. This change is very misleading.  Even though HUD’s official policy is changing, the mortgage banks that initially fund FHA loans have already raised the minimum score to 620; and that was done months ago.  The real story is that some mortgage banks are going to 640-660 as a minimum score in the future.  This will have no effect on demand as currently set.

Reducing the allowable third-party concessions from 6 percent to 3 percent. Third-party concessions are fees paid by someone other than the borrower at closing.  These fees include closing costs, taxes, insurance, prepaid interest, and upfront MIP.  They do NOT include down payment.  The borrower has to satisfy the minimum cash investment required by HUD, which, in most cases, is the 3.5 percent down payment.  This is the one change that will affect demand.  Closing costs and prepaids like taxes and insurance can add up; and, if we take away the seller’s ability (or that of any other third party) to pay these fees, the pool of qualified buyers is reduced and result in a decreased demand.

As you can see, sweeping change is not the terminology I would use.  The only change that may reduce overall demand is the rule about third-part concessions.  Unfortunately, only lower-priced homes will be affected by this rule.  A house with a purchase price of $100,000 that would allow only $3,000 in closing costs to be paid leaves the borrower in a position of having to bring more cash to closing.  That amount could be $1,200-$2,000 over the 3.5 percent amount required by HUD.  For a $200,000 home this change would allow for $6,000 in closing costs to be paid.  In this case covering everything is easy enough, and only the 3.5 percent requirement is needed.

Here’s a summary of these three changes:  (1) There is an increased upfront MIP, which will help HUD and its reserve account.  (2) The raising of the minimum credit score will have NO effect because the resulting credit score is still below industry standards.  (3) The lowering of third-party concessions will affect only borrowers in lower ranges of income and price.

In other words, we have BIG headlines behind which are meaningless changes that, once again, were not thoroughly thought through.

John McClellan
Branch Manager
Supreme Lending – Austin
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