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New limits on FHA-backed mortgages

The Federal Housing Administration, which insures up to a third of all new mortgages, has adopted some limits on the mortgages it will insure.

The FHA doesn’t make loans, but it insures loans made by other lenders in order to encourage lenders to give mortgages to people with shaky credit or little in the way of a down payment. The new restrictions will make it somewhat harder for such people to get mortgages.

The changes are:

  • Borrowers with a credit score below 580 will have to come up with a 10% down payment. This is an exception to the general rule that FHA borrowers need only a 3.5% down payment.
  • The “upfront” insurance rate for FHA backing will rise from 1.75% to 2.25%. Borrowers usually pay for FHA insurance in one of two ways: either with a monthly fee or “upfront” by rolling it into the loan amount. Borrowers who pay a monthly fee shouldn’t see any change, but borrowers who roll the insurance into the loan will have to borrow more – about $1,000 on a $200,000 mortgage.
  • A seller can pay only up to 3% of the home’s value as a contribution toward closing costs – down from 6% previously. This will make it harder for borrowers who want to pay “points” at closing in order to obtain a lower interest rate.

These changes are all designed to make it less likely that borrowers will get a mortgage they can’t afford, and subsequently default.

Another change will help borrowers, though. Previously, the FHA had an “anti-flipping” rule that said you couldn’t get an FHA loan for a property that had previously changed hands within the last 90 days. The problem with this rule is that it usually meant you couldn’t get an FHA loan for a foreclosed home – and these types of home are often very desirable for less wealthy purchasers.

So the FHA has waived the rule until February 1, 2011. (However, the rule still prohibits FHA backing for sales between family members, and there are restrictions if the sale price is 20% more than what the seller paid for the property.)

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