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RISMEDIA, September 28, 2010—On October 4, the Federal Housing Administration (FHA) will implement changes to the premium structures for an FHA-backed mortgage, making it more costly for home buyers to procure FHA loan products. This imminent change in FHA lending, along with the gradual stabilization of the marketplace, are paving the way for conventional financing with private mortgage insurance (MI) to make a comeback in lending for low down payment buyers. Real estate professionals need to stay current on these changes in order to properly advise clients on the best mortgage option for their particular situations.

“Real estate agents need to take the extra step to educate themselves on these changes and not just rely on their lender,” says Chuck Iverson, vice president of production for Sierra Pacific Mortgage. “They need to know what the options are. Knowledge is key to not only serving the customer but closing the deal.”

In the wake of the real estate decline and credit freeze of the past three years, FHA-insured loans soared as borrowers sought alternative avenues for securing affordable mortgages. The FHA loan is popular because its minimum down payment is 3.5%, whereas most conventional loans require a much higher down payment.

“Sierra Pacific Mortgage has been an FHA lender for 24 years,” reports Iverson. “Our roots are in the Sacramento (California) area, which has been a huge FHA market through the years. We got to a point in 2006, during the real estate boom, when FHA lending went all the way down to 1% of our total volume. But then we saw a major resurgence in FHA lending once all the other programs went away. The housing market decline, foreclosures, etc., caused the mortgage industry to retrench and huge LTV lending was taken off the table.”

Recently, however, housing experts have raised concerns about FHA’s shrinking funds and ability to handle increasing defaults, sparking the agency’s impending regulation changes.

“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities and supporting the nation’s economic recovery is critically important,” FHA Commissioner David Stevens said in a statement.

According to, FHA reported that its reserve fund has dropped to 0.53% of its insurance guarantees, well below the 2% ratio mandated by Congress and the 3% ratio it had last fall. This fund covers losses on the mortgages the agency insures. FHA borrowers pay for the insurance that backs their loans in the form of an upfront premium and an annual premium.

The agency has seen a spike in delinquencies amid the mortgage meltdown. Some 14.36% of FHA loans were past due in the third quarter, according to the Mortgage Bankers Association. To compensate for its rapidly depleting reserve fund, the following changes will be implemented to FHA lending:

– Upfront mortgage insurance premiums will decrease from 2.25% to 1.00%.
– At the same time, the 0.55% annual premium will be increased to 0.85% for mortgages with loan-to-value ratios up to and including 95%, and to 0.90% for loan-to-value ratios above 95%.
– Borrowers will be required to have a credit score of at least 580 to qualify.

According to Iverson, with the fees associated with FHA lending set to increase, it will behoove borrowers to consider alternative options. “Both MI and FHA have their place, but with the fees going up on FHA-backed loans, there are going to be borrowers in the high LTV space who are better off with a conventional loan with MI, particularly high-FICO score borrowers.”

“As lenient as FHA can be, they can be a little inflexible, too,” says Vince Kueffner, senior loan officer at Wintrust Mortgage in Chicago. “Instead, when you’re working with an underwriter in the private mortgage insurance industry, it’s not just about ratios. They can look at all the factors involved to see if someone can make their payments. The move back toward the private sector provides more flexibility for borrowers and allows them to come up with more inventive ways of getting people into homes without putting them at risk.”

“From a real estate agent’s perspective,” adds Iverson, “you have to make sure your lender is well versed in both—you need to work with a loan officer that is savvy enough and has access to the new MI options and who is well versed in the changes to FHA so that they can run various scenarios to determine what’s best for the consumer.”

Kueffner, who hosts seminars and outreach programs to educate the real estate community, agrees that partnership among all the parties involved in the home-buying process is more important than ever. “The ones that are going to survive are the ones that are you and me instead of you or me. Communication is now more important than ever because buyers are driving; they know they have power.”

FHA guaranteed more than $360 billion in single-family mortgages in fiscal 2009, which ended Sept. 30, more than four times the volume in 2007. That same year, the agency insured about 30% of home purchases and 20% of refinanced mortgages in 2009. Nearly 50% of first-time home buyers go through the agency.

According to Kueffner, FHA will continue to be a viable option for many home buyers, despite rising fees and more stringent criteria. Iverson agrees.

“FHA serves a vital need,” explains Iverson, “and the changes that are being made are being made to ensure that FHA is more solvent and is there to help secure homeownership for the future.”