What are the new FHA changes and how will it affect me as a buyer.?  On January 20, 2010, the Federal Housing Administration (FHA) said it is raising homebuyers' up-front costs for mortgage insurance, tripling down payment requirements for borrowers with low credit scores, and cutting seller concessions in half.  This means tougher loan qualifications and more expenses for you as a buyer.  Following are the policy changes:

1. FHA will raise up-front Mortgage Insurance Premium (MIP) by 50 bps.  The MIP will go from 1.75% of  loan amount to 2.25% of loan amount.  This new increase will go into effect this Spring.

2.  New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program.  New borrowers with less than a 580 FICO score will be required to put down at least 10%.   This will impact borrowers and the few remaining lenders that offer loan products for borrowers with FICOs less than 580.   However, it should have no affect on the majority of FHA lenders who currently have a minimum credit score requirement of 620.   This is expected to go into effect in early summer.  

3.   Reduce allowable seller concessions from 6% to 3%.  This is likely going to have the most significant impact on the smaller loan amounts where the borrower needs a higher percentage contribution towards closing costs.  It will have less of an affect on the larger loans.  This is also expected to go into effect early summer.

FHA says these changes are necessary to help better manage loan risk and losses.   Currently the agency is experiencing record-high delinquency rates.  The number of claims it has been forced to pay out has escalated and left its capital reserve funds depleted.  FHA's reserves have fallen far below what's required by law for the first time since the agency was formed.