Understand the Housing and Economic Recovery Act’s Federal Housing Administration guidelines

Jeff Mifsud, founder, Mortgage Seminars LLC

As published in Scotsman Guide's Residential Edition, December 2008.

July’s Housing and Economic Recovery Act of 2008 affects many aspects of the industry, including Federal Housing Administration (FHA) loans.

Regarding FHA-guideline changes, however, the thing to remember is that nothing becomes a guideline until the U.S. Department of Housing and Urban Development (HUD) publishes the changes in its mortgagee letters. So just remember to wait for the FHA’s official update before you change the way you write loans.

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At press time, the FHA has yet to publish all the relevant points in response to the housing bill. There are some critical points of the new law, however, that clearly impact FHA originators.

Here are nine things you should know about how the housing bill changes FHA loans:

1. New maximum loan limits: The maximum loan amount for FHA loans will be the lower of 115 percent of median home price in the area or 150 percent of the conforming-loan limit, which amounts to $625,500.

Many people are just hearing that the maximum limit is $625,500. In reality, though, the maximum FHA-loan amount for most metropolitan statistical areas in the country will be 115 percent of the particular area’s median home price.

The best thing to do is to visit the HUD Web site (shortcut: tinyurl.com/fhalimits) and search for the maximum loan amounts in your area.

2. Borrower cash investment: The housing bill requires FHA borrowers to make a 3.5-percent downpayment for their home purchase, an increase from the previous 3-percent requirement.

3. One-year hold on risk-based premiums: This past July 14, amid pressure from the financial markets to modernize the FHA, the agency published a risk-based-premium model using a credit-scoring model. When the housing bill was enacted two weeks later, the credit-scoring model was put on hold until this coming Oct. 1.

4. Prohibiting seller-financed downpayment assistance: The new housing bill essentially wipes out an entire sector of the housing industry: the FHA downpayment-assistance sector.

According to HUD data published in the Federal Register this past summer, foreclosure rates on loans with seller-financed downpayment assistance is nearly three times higher than the national average.

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