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Will the newly imposed changes to the FHA loan program, which finances one out of every three residential transactions in America, cause another drop to home sales?

Did Too Many FHA Buyers “Borrow Forward?”

Will the newly imposed changes to the FHA loan program, which finances one out of every three residential transactions in America, cause another drop to home sales?

If so, will the prospective decline in sales result less from the FHA changes themselves or aggressive marketing?

If the recent history of the rise and fall of the homebuyer tax credit is any indication, there is reason to worry. In the final weeks of the homebuyer tax credit, buyers planning to buy a home this year moved forward their purchases to qualify for the credit, creating a temporary surge in sales that was quickly erased by a 27 percent plunge last July.

Similarly, applications for FHA loans rose sharply in the week of September, just before the agency imposed changes to the popular program that add significant cost increases to borrowers and limit eligibility. Applications for all purchase loans were up 9.3 percent over the previous week, the highest increase in MBA’s Purchase Index since the week ending May 7, 2010. FHA applications drove the increase, rising 17.2 percent in the last week of September.

Last Monday, October 4, the changes took effect. FHA increased the credit scores required to qualify for a loan to a 580 FICO score in order to purchase a home with the minimum 3.5 percent down payment and required borrowers with FICO scores from 500-579 to make down payments of at least 10 percent. Those below 500 can no longer qualify for an FHA loan at all.

FHA also decreased the upfront mortgage insurance premium fee from 2.25 percent to 1 percent but increased the annual MIP raised from .50-.55 percent to .85.90 percent for terms greater than 15 years. Over the life of a 30-year $300,000, buyers will pay an additional $24,000. The larger payments will limit the amount for which some borrowers can qualify.

As FHA struggles to reduce its exposure to defaults, more changes and price hikes to borrowers may be on the way. From September 2008 to June 2010, FHA lost $15.8 billion to defaults and foreclosures.

“This is the second straight weekly increase in purchase applications and the highest Purchase Index level since the expiration of the homebuyer tax credit program. One possible driver of last week’s big increase in FHA applications was a desire by borrowers to get applications in before new FHA requirements took effect October 4th, which included somewhat higher credit score and down payment requirements.” said Jay Brinkmann, MBA’s Chief Economist.

Now that the changes are in place, will applications plummet for FHA loans, which are on track to reach 1.7 million originations in 2010? With FHA financing about one third of the market, will the overall market take another body blow?

Some experts say the credit score changes and the change in the MIP shouldn’t make much of a difference to borrowers.

“The new credit requirements are not expected to dramatically change the number of FHA mortgage approvals. Most lenders had already imposed a minimum credit score requirement of 640 or higher for FHA borrowers. In limited cases, borrowers with scores between 620 and 639 could still obtain mortgage approval,” says Monir Mamoun, an EXIT Realty agent in Morristown, NJ.

“Because most borrowers choose to finance the initial fee as part of the loan amount, the overall effect will be easier on the checkbook - for a few years, anyway,” wrote Lew Sichelman, columnist with United Features Syndicate last week.

Yet the blogosphere is full of warnings from mortgage brokers and real estate agents urging their customers to beat the FHA changes and establish a case number before October 4. “So if you are using an FHA loan and putting 3.5 percent to buy Temecula or Murrieta Real Estate, you will be paying a lot more PMI and have a higher payment which will stick for much longer than the small amount of upfront you would pay before October 4th. I strongly suggest you contact your loan person to see how these changes will affect you,” blogged one Realtor last month, Stefan West of Murietta, Calif.

Warnings like West’s certainly created a spike in FHA applications. Will they also create a trough?


  1. I think a lot of the communication surrounding this was pertaining to marketing as well as some misconceptions form what exactly the changes meant. That said, the net impact of the new MI structure increases total payment by 4% vs. the old structure. That will now eliminate a certain percentage of potential buyers that previously just barely qualified. Certainly not good to have a shrinking buyer universe (demand) in this market. The FICO change should have no impact since pretty much all lenders already require a higher FICO.

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