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Save The FHA

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Posted On: 03/27/2013

Question:

What changes has the Federal Housing Administration made to protect the program against losses?

Answer:

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There have been losses at the FHA – but not as recent as the public might think. Here's what's happening:

The FHA has been with us since the 1930s. It provides mortgage insurance for borrowers. Because of that, insurance lenders do not require 20 percent down for FHA financing: Today, such loans are usually available with 3.5 percent down for qualified borrowers.

Like all insurance plans, the FHA sets aside much of the insurance premiums it collects for reserves. However, FHA loans originated between 2000 and 2009 produced massive losses and greatly reduced reserve levels. Since then, new FHA loans have shown annual profits. In other words, the system is still suffering from loans made during the ‘boom’ era when standards and programs were different.

To offset past losses, the FHA has increased the required down payment, dumped large numbers of once-approved FHA lenders, ended “seller-assisted” down-payment programs and collected more than $1.2 billion in claims for allegedly improper loan originations.

Additionally, the Department of Housing and Urban Development has now announced new changes to the FHA program for 2013:

• FHA loans above $625,500 will require a 5 percent down payment instead of 3.5 percent.

• The annual mortgage insurance premium will be increased by 0.10 percent for most loans; however, for jumbo loans above $625,500 with 5 percent down, the increase will be 0.05 percent.

• The FHA mortgage premium will be extended through the life of the loan. Currently, it automatically ends once 22 percent of the original loan amount has been repaid.

• A minimum debt-to-income (DTI) ratio of 43 percent will be required when borrower credit scores are below 620. (Today, the average FHA borrower has a 696 credit score.)

• The FHA will stop insuring fixed-rate “Standard” reverse mortgages, but fixed-rate “Saver” reverse loans will remain available. The difference? Lower up-front costs with the Saver – but only smaller amounts can be borrowed.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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