FHA Mortgage Insurance
There has been a lot of speculation about FHA loan rules and its mortgage insurance premiums. They have risen steadily in the last few years, and there has been a great deal of speculation about where they're going in 2015. The agency's reserves are being replenished, and many in the real estate industry have called on the agency to reduce its mortgage insurance premiums and eliminate the requirement that the premiums be paid for the life of the loan, regardless of the homeowner's equity position. FHA responded in April 2014, saying that there are no plans to reduce its insurance requirements any time soon. Speaking at a Mortgage Bankers Association conference, FHA Commissioner Carol Galante claimed that the premium increases were necessary to fund the agency's Mutual Mortgage Insurance Fund, and there are no plans to drop them. The table below shows the current upfront and annual premiums. The upfront amount can be rolled into the mortgage, while the annual ones are divided by 12 and added to the monthly mortgage payment.
FHA Loan Rules
FHA mortgages have undergone some big changes in 2013 and 2014, but few alterations have been scheduled to take place in 2015. Here's a quick rundown of FHA loan rules for the coming year.
- This mortgage program is not limited to first-time buyers, and unlike community homebuyer programs from Fannie Mae and Freddie Mac, FHA loans do not have maximum income limits for borrowers.They are open to all applicants who meet the minimum eligibility requirements listed below.
- All FHA borrowers must have at least 3.5 percent equity or make at least a 3.5 percent down payment. However, that down payment can be borrowed, gifted by relatives or close friends, or awarded by a government or charitable down payment assistance program.
- The minimum credit score for a 96.5 percent mortgage is 580. However, the average credit score of FHA borrowers is closer to 700, and very few applicants with 580 FICOs are actually approved for loans. Applicants with low scores but a good payment history or other compensating factors have the best shot at approval.
- Borrowers with a credit score between 500 and 579 must put at least 10 percent down. Approval for applicants with scores in this range is very rare, however. The credit history must be decent even if the score is low, or past credit problems must be resolved and payments in the last 12 months must have been made on time.
- In most cases, the maximum debt-to-income ratio is 43 percent. That means someone with a gross (before tax) income of $5,000 a month can't have bills (including the prospective housing payment) exceeding 43 percent of that, or $2,150.
- FHA allows approval of applicants with higher debt-to-income ratios if the lender can prove the existence of"significant compensating factors." Such factors might include a history of regularly saving money, a mortgage payment that would be lower than the applicant's current housing expense,a larger-than-required down payment, or the purchase of an energy-efficient home.
- Applicants with credit scores lower than 620 plus a total debt-to-income ratio above 43 percent may not be approved unless a lender is willing to underwrite their loans manually instead of through the automatic underwriting system. Underwriters look for compensating factors to offset the low-score / high-debt combination.
- Lenders can impose requirements that are more strict than those required by FHA programs. These extra hurdles are called overlays. They do this to ensure that their default rates are not higher than those of other lenders in their areas, because if that's the case, even lenders that underwrite every loan in exact accordance with FHA guidelines can still lose their approvals to fund FHA mortgages. Consumers concerned about their credit, income or other factors may have to contact more lenders and work with one that doesn't add overlays.
FHA Loan Limits
FHA mortgage limits allow minimum down payments for purchase prices of 115 percent of the median price of houses in a given metropolitan statistical area or county. During the worst of the housing crisis, the Housing and Economic Recovery Act (HERA) allowed the government to keep limits higher than they would otherwise be (125 percent of median home values). In 2014, however, these limits reverted back to their old formulas, and in areas that lost a lot of home equity, the corresponding decrease in loan limits hit home buyers and sellers hard. New limits for 2015 have not yet been released (expect them in December 2014), but borrowers in areas in which home prices have risen can expect to have their loan limits raised.