Changes to FHA Program

On January 20, 2010, FHA announced major changes to ensure its long-term financial soundness. FHA is trying to balance three fundamental objectives: 1) financial soundness of the FHA insurance fund – ensuring that its capital ratio returns above 2 percent, 2) fulfilling its mission of serving borrowers not adequately served by the private sector and 3) facilitating the recovery of the housing industry and the over-all economy.

While the changes will result in some higher costs for home buyers, FHA mortgages remain one of the best options for many purchasers, especially first-time buyers who may not have stellar credit and/or a large cash reserve saved for a downpayment.

Changes include an increase to the upfront mortgage insurance premium, which is paid by the borrower when the loan is made, from 1.75 percent to 2.25 percent. For a loan of $100,000, the mortgage insurance premium would be $2,250, up from the current $1,750. The FHA also said it was cutting the amount of aid sellers could provide buyers (often referred to as "sellers concessions") from 6 percent to 3 percent of the purchase price.

The FHA is raising its minimum credit score for a 3.5 percent down payment to 580 while scores below that level would be required to have 10 percent down. But most FHA lenders won't lend to anyone below 620 so it's unclear how many borrowers would really be affected by the down payment change.

More info: FHA to Provide Early Relief to Struggling Homeowners

See the summary of changes from the National Association of REALTORS.