Major changes to the Federal Housing Authority (FHA) program went into effect on October 4th, 2010. Below are the main changes to the program and what it means to borrowers looking for an FHA backed purchase or refinance loan.
Up Front Mortgage Insurance Premium
This is the mortgage insurance the borrower pays at closing to FHA to insure the loan. Prior to October 4th, 2010 the required Up Front Mortgage Insurance Premium was 2.25% of the loan amount. Effective October 4th, 2010 the UFMIP is now reduced to 1%.
Annual Mortgage Insurance Premiums
This is the mortgage insurance the borrower pays each month as part of their payment. Before October 4th, 2010 all FHA loans required Mortgage Insurance Premiums of .55% annually regardless of the loan-to-value ratio. Effective October 4th, 2010 that will rise to .85% for loans with an LTV less than 95% and a term longer than 15 years. It will rise even more to .9% for loans with an LTV greater than 95% and a term longer than 15 years. For loans with terms equal to or less than 15 years there will be no change to the annual MIP.
Minimum Credit Score
FHA now requires borrowers to have a minimum 580 Mid FICO score. Prior to October 4th, 2010 there was no minimum credit score requirement. I find this to be least important change due to the fact that most lenders will not lend to borrowers with less than a 620 Mid FICO score anyways. At this point it’s more of a technicality.
The Department of Housing and Urban Developement (HUD) enacted these changes as a way to ensure financial stability for FHA. Although it will surely make FHA more financially stable, it will make their loan program seem less attractive than it previously was. See the chart below for an illustration.