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Lakeland mortgage borrowers looking to finance a home purchase using an FHA loan may experience higher levels of difficulty and cost come the Spring of 2010.

Issuing a statement on Wednesday, the Federal Housing Authority (FHA) presented some significant policy changes to its mortgage assistance programs designed to minimize its risk and boost the financial position of the mortgages that it backs.

So, what does this mean for Lakeland mortgage borrowers?  Put simply – these changes mean higher costs.

Per the FHA’s official announcement, there are 3 key guideline updates you need to consider when planning to use an FHA mortgage:

  1. There will be an increase in up front mortgage insurance premiums from 1.75% to 2.25%
  2. The minimum downpayment requirement for borrowers with credit scores below 580 will rise to 10 percent*
  3. Sellers will only be able to contribute 3% of their home’s selling price towards borrower closing costs, down from today’s allowable 6%

*Note: Though the FHA may allow credit scores at or below 580, nearly all mortgage lenders today require credit scores of 620 or higher.  Lenders have and often exercise the right to establish borrowing criteria that go above and beyond what backers like the FHA and VA require.

In addition to these planned changes, the FHA has asked Congress for permission to increase the monthly mortgage insurance premiums currently being charged to FHA home loan borrowers.

What Are the Real Reasons Behind the FHA’s Newly Tightened Guidelines?

It’s pretty clear what the FHA is trying to accomplish with these newly tightened mortgage borrowing restrictions.  It’s a balancing act, really.  On one hand, the FHA wants to provide deserving families and individuals with affordable home loan financing – something that they express in the FHA mission statement.   However, the FHA must also maintain control over the risk that comes with insuring lesser-quality loans.  (In this case, I point to FHA loans as being lesser quality as opposed to Conforming loans that often have tighter credit restrictions and higher downpayment requirements.)

By ramping up its guideline requirements, the FHA hopes to limit the negative impact of “bad lenders”  – who often do not provide any additional limits past what the FHA requires – in hopes of stopping problems like higher loan default rates where they start.  To this end, the FHA is also introducing what it calls a “termination clause.” If banks or loan officers begin to issue more than an acceptable number of loans to less than qualified or risky borrowers, they will lose their right to originate FHA mortgages.

As a result, homebuyers in Lakeland should expect tougher FHA underwriting in 2010. Not because the FHA says so, necessarily, but because banks don’t want to do “bad loans.”  This is where additional restrictions past what the FHA requires will begin to become more and more prevalent.  See, mortgage lenders are incented to turn down at-risk applicants and, already, we’re seeing examples of this.   As I’ve stated above, despite FHA allowing 580 FICOs and lower, many banks have made 620 their minimum.   Additional guidelines above what the FHA requires may also come into play as banks and lenders try to protect their right to issue FHA loans.

The FHA’s new guidelines don’t go into effect until spring.  So, between now and then, the old guidelines will apply.  Therefore, if you know you’re going to need a Lakeland FHA home loan in the next few months, consider moving up your time-frame.

If nothing else, you’ll save some money at closing.