Recent FHA Changes Make Financing Tougher for Bellingham WA Real Estate

Prior to and since the crazy days of real estate financing, FHA loans have been the primary loan of choice for those borrowers with downpayments of less than 20%.  The 20% rule gives a lender more cushion against falling prices and the inevitable rising foreclosure rate they bring.   With FHA’s typical downpayment requirement of 3.5%, there isn’t much of a cushion. 

Before we talk about the changes, let’s make clear how an FHA loan works:

The FHA doesn’t make loans – they guarantee loans written to their standards and made by FHA authorized lenders.  Think of the agency as an insurance company who insures the lender so they will make a riskier loan.  The borrower buys the insurance policy for the bank in lieu of making a larger downpayment.  There is an upfront premium that is financed as part of the loan and monthly premiums that are added to the monthly payment amount.  The premiums collected by FHA are supposed to cover losses the agency may incur.   

Unfortunately, the financial problems our economy is experiencing have hit the FHA particularly hard.  A few numbers tell the tale:

• Congress requires FHA reserves of 2% based on their insurance guarantees.  Last fall they had reserves of 3%.  As of November, they had reserves of .53%
• The amount of single-family mortgages insured by FHA in fiscal 2009 were more than 4 times the amount insured in fiscal 2007.
• Almost half of first time homebuyers get an FHA loan to purchase.
• In the 3rd quarter of 2009, 14.4% of FHA loans were deliniquent, compared to 9.6% of all loans.

As a consequence, FHA is doing what any insurance company must do to control losses:  they are tighening the qualifying requirements for coverage.  Changes and impacts include the following:

• The upfront premium amount is increased from 1.75% to 2.25%, and it is proposed to increase the monthly premium from .5% to .55%.  Since the initial premium is financed as part of the loan, the payment increases.  As already noted, the monthly premium also increases the monthly payment.  Since borrowers are limited to monthly payment amounts based on their income, they will be able to afford less expensive houses.
• In the past, the seller of a house to an FHA borrower could pay up to 6% of the purchase price toward the borrower’s cost of getting the loan.  The new rules cap this at 3% of the purchase price, which is comparable to the amount of seller contribution for a conventional loan.  This means a buyer will need more cash to buy a home, even though the downpayment amount stays at 3.5% (for now).
• In addition, the agency will be monitoring lenders who offer FHA loans more closely and is asking Congress to increase the liability of those lenders.  This may reduce the number of lenders approved for or willing to make FHA loans.

Over the past 20 years (and before), there has been a great deal of pressure to increase homeownership in the United States.  There have been strong sociological as well as political reasons for this pressure.  The pressure has lowered the standards required to get a home loan at the same time that lenders were getting very creative with buyer qualification.   The current economic downturn has destroyed paper equity and caused loss by foreclosure for homeowners at all economic levels, but those who stretched the hardest to buy or who had the least “skin in the game” have been more likely to lose their homes. 

There will be criticism of this move on the part of the FHA, but a question that should be asked is, “Which is the more negative impact on a family:  living in rented housing or fighting to buy a home and then losing it because they really weren’t strong enough financially to handle it”?  There has to be a balance somewhere – hopefully these changes bring it closer. 

I would love to have your thoughts and/or clarifications on this topic – limiting the number of people who can buy a home right now is not where most of us want to be.

For more information on Bellingham Real Estate or to search for homes in the Bellingham and Whatcom County area visit www.JohnsonTeamRealEstate.com, your one stop Bellingham real estate and community information resource!