For months, rumors have circulated that the Housing of Urban Development (HUD) was planning to make changes as to who does and does not qualify. However, to put these rumors to rest, HUD clearly stated that for Federal Housing Administration (FHA) loans, there will be no changes as to who qualifies.
In October of 2013, there was an announcement from HUD pertaining to a change in the exempted transaction definition. For this, a final rule was established for the “qualified mortgage” definition. Status was connected at insurance endorsement and origination for single-family home mortgages insured under the National Housing Act specific ethnic groups.
However, in a statement from HUD regarding the new lower annual premiums associated with FHA loans, this will not result in another bailout by taxpayers. In 2013, the government insurer required a taxpayer infusion in the amount of $1.7 billion but last year, it was in the black.
No Qualification Changes
According to Julian Castro, secretary with HUD said that who qualifies for an FHA loan is absolutely not changing. The FHA is an entity of HUD and as stressed, the focus for homebuyers using this type of loan is affordability, as it always has been.
Rather than originate home loans, the FHA insures them using down payments that can be as low as 3.5 percent. However, during the recent housing market crash, annual premiums were increased 140 percent. As a result, there were literally thousands of borrowers who simply could not qualify. Just a week ago, the premium declined by one-half a percentage point, hitting 0.85 percent of the loan balance, down from 1.35 percent.
To ensure that middle-class families are given the same opportunity as other buyers to own a home, this is a critical step. In addition to making housing affordable, HUD needs to make sure the FHA’s insurance fund is properly protected. In the past couple of years, this fund has increased in value by $21 billion, primarily because of new borrowers who have stellar credit.
Freddie Mac/Fannie Mae versus HUD
In 2014, Freddie Mac and Fannie Mae, which are government sponsored organizations, stated the new borrowers, as well as current homeowners interested in refinancing, would be allowed to make a low 3 percent down payment. If borrowers with great credit were to choose Freddie Mac or Fannie Mae opposed to FHA, a considerable portion of the housing market would be lost, which in turn would have been devastating to the fund.
In addition to a lower down payment, Freddie Mac and Fannie Mae do not mandate mortgage insurance for the life of the loan whereas the FHA does. Castro added that while the director of the Federal Housing Finance Agency is doing many great things, they are not driving the ultimate decision specific to qualifications. Ultimately, the goal is to ensure the fund remains strong.