Some economists are in agreement that new tougher guidelines that are being implemented by the FHA could slow the amount of new mortgages that the federal agency is willing to back. This development could leave many potential new buyers little to no alternative options for what was once considered sub-prime lending.
Many buyers relied upon the backing of the Federal Housing Administration to give their less than perfect loan qualifications a “stamp of approval”. The tightening of the rules and requirements by the FHA has begun to shut out these hopeful homeowners.
The loss of these non-FHA qualified loans is destined to affect the housing market recovery efforts. The numbers are difficult to estimate at this time, but may real estate professionals agree that sales numbers for the future will take a severe dip. The FHA currently insures 30% of all newly originated loans. This is a dramatic increase from 2007, where they only backed 3% of home loans. The greater role that the FHA is playing in the housing market makes its decisions felt on a grander scale.
The FHA’s tighter regulations are a direct result of their efforts to reduce the amount of defaults on loans that they have insured. The immense amount of foreclosures over the past couple of years has depleted their reserves. The hope is that with the new requirements in place more attention will be place on the quality of future loans, and not the quantity. This should reduce the amount of future foreclosures, and begin to return some well needed cash to the FHA’s reserves.
Some of the new changes that are scheduled to take effect in the later part of the 1st quarter of 2010 are as follows;
- Borrowers will have to have at least a credit score of 580 to qualify for the 3.5% down payment. Those whose credit score is below that will now have to come up with 10%. Traditionally the average borrower using a FHA backed loan has a credit score of 693.
- The allowable seller concessions are now being reduced from 6% to 3%. This change is being implemented in hopes to reduce inflated appraisals.
- The fee for upfront mortgage insurance is receiving an increase from 1.75% to 2.25%. This will require the buyer to have more “skin” in the deal and potentially reduce to default rates of new loans.
The short term effects on the new regulation may in-fact slow new homes sales, but the long term effect will be a reduction in foreclosures due to more qualified buyers. The strength of the housing market depends upon quality underwriting of new loans, and the financial worthiness of new buyers.
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So is this suppose to be good or bad news
.-= Hand held vacuum cleaners´s last blog ..Hand Held Vacuum Cleaners =-.
If this body was a private or public company its shareholder would be pleased with there actions
.-= Spanish Hot Properties´s last blog ..Spanish Property Buyers in Costa del Sol Need To Be More Realistic =-.
Yet another reason why I think home ownership will drop. Loans are harder to get. It definitely needs to be done so we can avoid another market like the current one. People need to QUALIFY to own a home and be able to afford it.
.-= Chas@Las Vegas Real Estate´s last blog ..A Rise in the Condo Market =-.
Very good points Chas,
Unfortunately some people bought who never should have and how many agents turned down the sale and commission in the good times?
Yes Chad. Home Loans should qualify homeowners according to their assets, capacities and how they can pay it at exact time. There should be a clearer perspective about how these loans can benefit both players in the real estate market.
.-= Orem Utah Homes´s last blog ..Previewing February’s New Home Sales: The numbers declined! =-.
If you think about it, these new rules are what should have been applied in previous years. All thats happening is that the financiers are getting back to whay things should always be.
It was the loose way in whihc loans were underwritten that got the world economy in the sate it is now. So if that means this will effect the speed of economic growth then tuff! Its called consequences!
Regulations and guidelines for getting a full eagle have definitely tightened up; but while some brokers are complaining I think its great and promotes homeowner awareness and safety; FHA guidelines also build trust with homeowners at a time of financial crisis.
It could stall recovery efforts, but that’s not always a bad thing. The quickest way to recovery is to spend and buy our way our this recession, but that would just lead to a bigger deeper recession a few years from now. One of the big causes of the current crisis was that we put off paying the piper multiple times earlier in the decade.
If we’re going to do it right, it’s going to require some time and pain to fix this mess.
Unfortunately, a true recovery is going to involve a complete rethinking about the way we think about the economy. The Keynesian, consumer led economic models so popular over the last couple of decades just don’t have real answers.
This tightening of the FHA Guidelines didn’t really change much. Lenders were already using much tighter guidelines on their own well before this change took effect.