FHA Loans: Waiting Will Cost You Big Time

The FHA is making proposals to change mortgage insurance premiums, FICO (credit score) and down payment combinations and seller concessions. The changes will be posted in the Federal Register next month and after a comment period would become effective early summer.

With these rule changes, an FHA loan could cost you 10% more to close. That's $25,000 on a $250,000 loan.

3.5% Down Payments and seller concessions of up to 6% will soon be a thing of the past for many. Mortgage insurance premiums will also increase by 1/2 point.

Here is a quick summary of the changes:

• Increase upfront Mortgage Insurance Premium (MIP) to 2.25% – up 0.5%
• Decrease seller concessions from a maximum of 6% to a maximum of 3%
• Change FICO score/down payment combinations to as low as a 3.5% for a FICO Score above 580 and up to 10% for a FICO Score below 580.

So, with a FICO score below 580, the amount of out-of-pocket money to close an FHA loan would increase by about $25,000 on a $250,000 mortgage ($1,250 MIP, $7,500 increase in seller’s concession, $16,250 increase in down payment). This would be added to the current total cost, an increase of 10%. A FICO score above 580 could still add about $8,750 or 3.5%.

The FHA is taking these actions to reduce troubled mortgages in the future. They will also be making changes to reduce fraud.

These actions will allow them to add to their reserves against bad loans. As a home buyer, these changes will increase your overall costs to borrow tremendously.

Stay tuned, we'll keep you updated on these FHA Loan changes as they become effective.