A Careful Balance

FHA stands for The Federal Housing Administration.  They have been offering mortgage insurance since 1934.  It is the largest insurer of mortgages in the world.  Without FHA many homeowners would never have been able to purchase a home.  FHA is typically used by first-time buyers because it requires a small down payment of 3.5%, the mortgage insurance premium can be financed, and the seller may assist with closing costs for the buyer – up to 6%.  The benefits of this program have helped many own a piece of the American dream.

Unfortunately, with the number of defaults on the rise it has come time for FHA to make some drastic changes.  These changes will take effect on April 5, 2010 and could cause issues for some home buyers.


  • Increased Mortgage Insurance – From 1.75% to 2.25%
  • Down Payment – Will Stay at 3.5% for homebuyers with credit scores of at least 580.  If the credit score is below 580 a 10% down payment will be required.
  • Reduced Seller Concessions – From 6% to 3%

The problem is that the housing market and overall economy could be negatively impacted if the new changes cause tighter lending in an already volatile market.  However, the FHA has carefully balanced the new requirements to reduce risk but still offer affordable mortgages. The increased mortgage insurance premium can be financed and so buyers will pay that extra premium over the life of the loan – not upfront.

The overall impact should be a positive one.  The average credit score for a FHA loan has already increased from 630 in 2007 (over 50% were under 620) to 690 in 2009 (only 10% were under 620) due to tighter restrictions last year.  There has always been a correlation between lower credit scores and default.  The new changes force borrowers and lenders to have more “skin in the game” and be accountable for the loans.

However, when a home buyer goes to purchase a home in April they will face a higher mortgage insurance premium and possibly more money upfront in the form of down payment or closing costs.  So if you are planning on purchasing a home in the next year it would still benefit you to get started now!


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