Are There FHA Changes on the Horizon?
FHA seems to be the new subprime loan because it requires the least amount of money down. The Wall Street Journal wrote in the article below that “Hundreds of private lenders, using the latest technology and paying high salaries, failed to adequately manage mortgage credit risk during the housing boom. Now, the Federal Housing Administration, using 24-year-old computer programs and civil servants who still handle some loan documents by hand, is trying to do better.
At an FHA processing center in Philadelphia’s Center City — one of four such centers across the country — the number of loans approved for insurance has soared to an average of about 40,000 a month from 12,250 a year ago. Each day couriers drop off about 700 mortgage loan applications in paper form, typically 150 to 200 pages each, to the Philadelphia office. The FHA recently began testing the use of scanners to convert those documents into digital form. For now, though, employees still thumb through them manually to make sure the forms are complete.
As President-elect Barack Obama and his transition team consider how much risk the government should take as one of the nation’s largest insurers of home mortgages, a more immediate question is this: Can the agency handle the responsibility it has already been given?”
Are they taking on too much risk? The bulk of most mortgage brokers and banks loans are FHA mortgages. They may be taking on too much but they do collect an upfront mortgage insurance premium of 1.75% of the loan amount on every loan. This fee goes to the government and can help them cover some of the losses if a borrower is to default on a loan. I think you will see more changes coming from FHA with regards to credit scores and maximum debt to income ratios. This isn’t necessarily a bad thing seeing as a loan can be approved with a debt to income ratio of as high as 55% of your gross income and it doesn’t take into account groceries, insurance, etc. In my opinion you should never let that figure go above 40%, preferably 36%.