Traditionally, an FHA loan is used by buyers who are not able to qualify for a conventional loan but still had the financial means to make mortgage payments. FHA guidelines were more flexible for loan eligibility and buyers were not required to put up a 20% down payment. Instead, down payments were set at 3.5% of the purchase price. The Federal Housing Administration has made changes to their home loan program which went into effect October 4. The new rules will have an impact on potential homeowners considering an FHA loan and for all applications submitted after October 3rd.
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Under the new rules, borrowers can still save money at closing but will be making higher monthly payments towards their mortgage. The minimum credit score requirement has been set at 500, in place of the old rule where there was no minimum credit score requirement. For borrowers with a credit score lower than 580, a 10% down payment is required instead of the traditional 3.5% down payment.
The former FHA loan rules also required a one-time payment of 2.25% upfront insurance payment paid at closing. That percentage has increased by one-percent under the new rules. The annual mortgage insurance premium is also calculated each year, divided by 12, and paid each month with your mortgage payment. In the past, the rate was set at 0.55% of the loan balance each year. A new rate of 0.9% had been put into affect.
There is also a good news for homeowners looking to refinance, but have little opportunity due to being upside down on their mortgages. Under the new rules, FHA refinancing loans are now available to more borrowers and there are incentives for lenders who participate in the program. This program is only temporary but if you meet all of the following criteria, you may be eligible to get approval for the refinance:
The FHA loan program used to allow seller’s assist up to 6% of the sales price but the FHA has proposed a measure that will limit the assistance to 3% in cash help. All other amounts would be considered as a reduction on the home. This measure may help to increase the popularity of the program with home sellers. This rule is not in effect but a decision is expected by the end of the year.
An FHA mortgage may still be a great resource for potential homebuyers who are not able to secure a conventional loan. Even with the changes and the proposed changes, buyers that are qualified will still benefit from the program. The FHA loan and the USDA Rural Development loans are still the most flexible programs in the mortgage industry. If you are considering either loan, remember that both loan programs are definitely growing in popularity so do the legwork before you apply to ensure you meet all criteria and can secure a mortgage in a timely manner.
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